IKEA Strategic Analysis and the Environment in Which the Organization Operates - Case Study Example

IKEA Strategic Analysis Introduction In this paper, IKEA, a leading multinational furniture retailer will be examined; the PESTLE analysis will give a broad overview of the environment in which the organization operates. Later on, IKEA’s PESTLE analysis will provide the basis upon which each of the environmental factors will be assessed, with the sole purpose of identifying the ones that have the greatest impact on the retail industry in general, and on IKEA in particular. In addition to that, this report will also identify what the organization should focus on right now to respond to the highlighted factors; finally, this report will consider the manner in which IKEA will perform in the future while debating three of the PESTLE factors. Company Profile Headquartered in Leiden, Netherlands, IKEA was founded in 1943 by Ingvar Kamprad Elmtaryd when he was only 17 years old; the name IKEA is an acronym that derives from the initials of his name and the place where he was raised, Agunnaryd. IKEA is presently under the leadership of its President and CEO Peter Agnerjall (IKEA, 2012); the company has grown significantly since it was founded, thereby becoming the world’s largest furniture retailer, famed for its Scandinavian touch (Zuvela, 2008). The company has a wide range of offerings, including home furniture and accessories, prefabricated housing, as well as food; presently, IKEA has numerous stores across Europe, Asia, North America, and Oceania, as well as Africa. IKEA’s interior design work, which is known world over for its eco-friendly simplicity, is unmatched and completely admirable; the company delivers functional, well-designed, as well as low cost home furnishing products (Chu, Girdhar & Sood, 2013). The company’s rapid growth is guided by its solid franchising business model; with 330 stores and a workforce of 154 workers, the retailer’s sales turnover for the year 2012 was 27.5 billion (IKEA, n.d). IKEA’s PESTEL Analysis The following section describes the political, economic, social, technological, and legal, as well as environmental factors in the retail industry within which IKEA, the leading global furniture retailer operates. Political factors The political stability of states across IKEA’s global locations is a great variable factor that directly affects the company’s business success; when the political environment is unstable, the firm is more likely to suffer losses. Political authorities also have a direct influence on both the level of corporate tax as well as consumer taxation, and by extension, on the after-tax income recorded by corporations; corporate tax, imposed on the profits of corporations, inevitably affects their after-tax incomes. The rate of corporate tax varies significantly across different political jurisdictions, which implies that the company’s after-tax income is determined by the regional tax rate; for instance, the UK, US, and Japan impose a 30%, 35%, and 42% corporate tax on businesses respectively. Economic factors Different markets grow at varied rates, thereby influencing the growth rate of corporations as well; in rapidly growing economies, the higher employment rate, improved standards of living as well as increased disposable incomes raises the consumer’s purchasing power thereby boosting business profits. Furthermore, the cost of labour, which varies significantly across different locations, has great impact on IKEA’s business profits; in regions such as China and India, which have a constant supply of low-cost skilled labour, IKEA enjoys higher profit margins. The inflation rate across IKEA’s diversified trading locations determine its profit margins; for instance, the high inflation rate in regions such as the UK affects consumer behaviour thereby provoking shifts in markets while creating shortages in resources. Social factors IKEA’s business success is also subject to social factors such as progressive shifts in demographic variables across its diverse locations; for instance, variations in incomes, ages, and family size, among other variables, in different countries greatly affect the company’s strategic decisions. IKEA is forced to market and sell furniture depending on the market demographics in the regions within which it does business; for instance, the company designs trendy furniture for the young and fashionable generation while in ageing population segments; its sales are considerably reduced. In addition, cultural preferences coupled with fashion trends and shifts in consumer tastes end up regulating the demand for IKEA’s products, thus, the company’s commitment to producing trendy, and portable furniture that is easy-to-assemble. Technological factors IKEA has greatly benefited from technological advancements that have led to wonderful innovations such as the Radio Frequency Identification (RFID), online as well as mobile shopping, which have completely revolutionized the manner in which business is conducted in the retail industry (IKEA n.d., p.25). While the RFID reduces IKEA’s operational costs, the company has been able to increase sales through the development of its online stores and adoption of mobile payment, features that have completely transformed customers’ shopping experiences. Social media marketing has further generated increased awareness of the IKEA brand, while broadening its market reach and enabling it to develop personalized relationships with its customers. Environmental factors IKEA’s business operations across the world are in consideration of its potential impact to the surrounding natural environment; IKEA is obliged to operate in ways that minimize as much as possible any negative impact to the environment while contributing to environmental conservation efforts (IKEA n.d., p.3). For a company of its magnitude, IKEA has to demonstrate sensitivity as well as accountability towards the environment, by reducing and possibly eliminating carbon emission, while contributing to the creation of a greener environment, as well as community development (People & Planet n.d., p.5). Numerous governments across the world impose certain levels of environmental protectionism that compels multinationals such as IKEA to uphold specific operational standards that help in the reduction of negative consequences to the environment. Legal factors IKEA’s business is also subject to the varied legalities existing in the numerous states within which it conducts its operations; for instance, different countries impose different legislation that govern the business operations, particularly of multinationals such as IKEA. For instance, the consumer protection laws of respective countries serve to ensure that corporations produce high quality goods and services that adequately meets all the market needs without creating shortages. The UK’s Sale of Goods Act of 1979 requires that all corporations must supply the best quality goods and services with no defects whatsoever to serve the specific purposes for which they were manufactured for, which again must be described clearly. Apart from complying with the consumer protection legislations, IKEA is also subject to other laws such as the employee protection, and health, as well as workplace safety, among others, in all its trading locations (Tarnovskaya, Ghauri & Elg n.d, p.9). Impact on the retail Industry and IKEA The PESTEL factors described above have immense impact not only on IKEA, but on the retail industry in general; nonetheless, the political, economic, social, and environmental factors have the greatest impact on the company. IKEA operates in a highly versatile and competitive market that results to myriad weaknesses; for instance, its vast network of operations and scale of business has inevitably resulted to challenges such as ineffective communication, which undermines the sharing of information with clients and stakeholders (IKEA n.d., p.56). In such a highly competitive market, IKEA experiences other weaknesses in terms of difficulties in managing stakeholders, differentiating its products, and ensuring its suppliers comply with the IKEA Group Code. Furthermore, IKEA faces stiff competition from its competitors such as Argos, which often registers the highest number of store visitors; apart from Argos, DFS rivals IKEA in advertising, and together, these two competitors reduce IKEA’s market share significantly. The company is presently faced with numerous threats including the global recession and supplier issues, as well as social trends such as the decreased entrance of first-time homeowners, which inevitably affects the sale of furniture. Furthermore, the ever-growing competition coupled with decreasing disposable incomes greatly reduce IKEA’s global sales and business profits respectively; with the reduced purchasing power, consumers are compelled to settle for low quality products, so long as they are affordable. Recommendations on how to respond In addressing the political, economic, social, and environmental factors mentioned above, IKEA can take a number of actions. Primarily, IKEA’s capital strength is found in the company’s adoption of strategic practices including effective utilization of resources to minimize costs of production, and optimum use of recycled material (People & Planet n.d., p.14), as well as the adoption of innovative technologies like the catalogue iPhone application to transform customer experiences. In that respect, IKEA should continue with its strategic practices because they are a distinctive way of creating value, thereby a great source of competitive advantage that enables it to beat competition. Also, since it is considered the global leader of the retail furniture manufacturing industry, IKEA can take advantage of its powerful brand image to assure its specific consumer groups across diverse markets the provision of nothing short of products of uniform quality and range. Nevertheless, the ongoing shifts in the factors influencing consumer choices including levels of quality, customer service, and discounts, as well as offers represent opportunities for IKEA; the company can take advantage of the shifts, to offer high quality products at discounts and offers, alongside excellent customer service. The company needs to meet the high demand for eco-friendly and low-priced items whose production process does not harm the environment while contributing to environmental conservation efforts, to promote business sustainability, competitiveness as well as productivity (Kanani, 2014). IKEA’s future projections Granted that its record of accomplishment over the years has been impressive, IKEA has greater future prospects, and it’s upwards trend in global sales is more likely to continue uninterrupted in the coming two decades or so, despite the numerous challenges it currently faces. IKEA’s journey to the top of the food chain in the retail furniture industry has been long and tumultuous, and its unrivalled business success has a strong foundation in the company’s solid franchising business model (Caglar, Kesteloo & Kleiner, 2012). The company will continue offering high quality, low-priced products while remaining sensitive to environmental issues and despite the myriad challenges, it currently faces in terms of increasing competition from rivals, supplier issues, as well as shifts in social trends. Precisely, IKEA’s future performance is more likely to be enhanced greatly, if the company continues on its trajectory of material optimization, adoption of innovative technologies, while differentiating its products and responding to issues such as environmental and legal concerns (Kanani, 2014). Whereas on one hand the high corporate tax, imposed on the profits of corporations, inevitably reduces IKEA’s after-tax incomes in some locations, this effect is counteracted by other advantages that the organization enjoys. For instance, tariff and trade barriers affect business across diverse locations, because they inevitably lead to the increase in prices of products imported into countries; local producers gain immensely from tariffs and trade restrictions because they are never compelled to lower their prices, though at the expense of local consumers. IKEA’s model of operation enables it to circumvent the negative impact of tariffs and trade barriers; since the company gets its products directly from local manufacturers in its worldwide locations, rather than relying on imported products, its business profits remain unaffected by tariffs and trade barriers. Therefore, by further diversification of its markets, IKEA is capable of addressing the financial risks that it currently faces in its global markets, due to varying economic growth rates in those countries; the company could further evaluate its markets to identify where to expand its business, while reducing its investment in markets where business is slow. IKEA can respond effectively to the ongoing shift in social trends by remaining alert to the specific changes, and varying its strategic decisions accordingly, to match its products to the emerging market sensibilities. By constantly engaging in research and development, IKEA can successfully advance its technologies, and through constant innovation, the company will definitely achieve the desired competitive advantage that would enable it to beat competition and to remain in the lead of the retail industry. Conclusion Ultimately, this report has provided details of IKEA’s strategic analysis, while paying particular attention to the political, economic, social, and environmental factors as the most significant variables affecting the retail sector in general, and IKEA in particular. This report concludes that given its impressive record of accomplishment over the years, ICEA is more likely to experience increased growth and sales in the coming two decades or so, despite the emerging threats it currently faces. References Caglar, D., Kesteloo, M., & Kleiner, A. 2012. How IKEA reassembled its growth strategy. Available at: http://www.strategy-business.com/article/00111?pg=all Chu, V., Girdhar A., & Sood, R. (2013). Couching tiger tames the dragon. Business today. Available at: http://businesstoday.intoday.in/story/how-ikea-adapted-its-strategies-to-expand-in-china/1/196322.html IKEA, 2012. About the Ikea group. Available at: http://www.ikea.com/ms/en_GB/about-the-ikea-group/company-information/ IKEA., n.d. IKEA Group Sustainability Report FY13. Available at: http://www.ikea.com/ms/en_GB/pdf/yearly_summary/sustainability_report_2013_final.pdf IKEA., n.d. IKEA Group Yearly Summary FY13. Available at: http://www.ikea.com/ms/en_GB/pdf/yearly_summary/ikea-group-yearly-summary-fy13.pdf Kanani, R. (2014). Why IKEA thinks this mega-trend will define the next 30 years of business. Forbes. http://www.forbes.com/sites/rahimkanani/2014/02/07/why-ikea-thinks-this-mega-trend-will-define-the-next-30-years-of-business/ People & Planet. (2014). Positive IKEA Group Sustainability Strategy for 2020. Available at: http://www.ikea.com/ms/en_GB/pdf/people_planet_positive/People_planet_positive.pdf Tarnovskaya, V., Ghauri, P.N., & Elg, U. (n.d). Market driving strategy: IKEA’s global sourcing network in two developing markets. Snee. Available at: http://www.snee.org/filer/papers/482.pdf Zuvela, M., 2008. “IKEA mulls joint venture with Bosnia furniture maker”. Reuters. Available at: http://www.reuters.com/article/2008/01/08/idUSL0861625720080108 Read More