Strategic Management and Pestel Analysis of Ikea - Research Paper Example

Strategic management: IKEA BY YOU YOUR SCHOOL INFO HERE HERE Strategic management: IKEA PESTEL analysis At the political level, IKEA faces considerable opportunities and challenges as a global furniture retailer. Because the company has many operations in North America, Europe and Asia, the unique political environments for each region provide ongoing changes and flexibility to its operational and procurement models for each territory. In Eastern countries, there is a very large problem with child labour that puts considerable difficulty on supplier methodology. In developing countries, there are fewer workplace regulations regarding these practices, thus children below the age of 14 are often used to produce goods (Hunter, Gorden & Tan 2004). IKEA has been forced to develop a supply chain model that is very scrutinizing of supplier labour policies, putting considerable strain on in-house procurement to ensure compliance to IKEA’s no child labour processes. These can represent significant costs and restructuring of the supply chain to ensure that no products are being subcontracted from regions that use child labour in production. At a time when IKEA is concerned with cost-cutting measures, this can complicate distribution and operations, making political issues in child labour a budgetary problem. In Russia, IKEA global has been hindered by ongoing corruption that is occurring at the governmental and cultural levels. IKEA actually froze its investments in Russia in 2009 due to its anti-corruption stand and a recent scenario that involved bribes paid to subcontractors related to the procurement of electricity suppliers in St. Petersburg (Betts 2010). This puts pressure on strategic expansion plans as the company must cut through bureaucracy red-tape and attempt to gain governmental support for anti-corruption. In many ways, IKEA is at the mercy of regional governments who seem, in some territories, to turn a blind eye to these business practices. Campaigning against corruption represents a similar strain to operating budget and proper, efficient utilization of executive personnel. Betts (2010) identifies that IKEA has also dealt with corruption in France that was occurring from political groups that suggested IKEA was involved in the exploitation of French workers at its stores. IKEA received cultural backlash from French citizens on picket lines that disrupted trading with 26 French retail stores. IKEA must continuously deal with political angst in certain countries where it operates and, since the company’s supply chain is global, becomes a target of political objectives. The economic environment differs in each area of operation for IKEA. In Britain, low-income regions have given the company opportunities to diversify and earn better profitability. IKEA launched its own timber-framed homes called BoKloks, which are prefabricated houses designed to fill a niche where Britain has less emphasis on affordable housing (Tighe 2006). This effort led to large-scale concerns from homemakers as this brought more competition to the brick-built housing market players. However, the economic conditions in this European country allowed IKEA to stay in focus with its strategic expansion goals. The weakened U.S. dollar has also given rise to new opportunities for profitability. U.S. furniture manufacturers, IKEA’s competition, have experienced slow gains in sales profitability because of this weakened dollar, whilst also experiencing higher food prices and fuel prices (Dibenedetto 2008). IKEA in Asia and Europe has taken advantage of the U.S. declining dollar value with more importation into the country so as to take market share away from U.S. domestic furniture producers. The economic conditions in the United States represent opportunity in the global supply chain. There is a growing international demand for do-it-yourself assembly products since they represent a low-cost option for better lifestyle enhancement. Design and aesthetics are in high demand at the social level especially with middle-class buyers. “If an offering cannot be made affordable to middle-class shoppers, it won’t be offered at all” (Burgess 2008, p.2). IKEA gains opportunity through these social values since the foundation of the company’s business model is around affordability with a modern and aesthetic flair. However, rising costs of living and shrinking consumer disposable income makes it difficult for IKEA to expand its target market audiences in the event that it desires to offer higher-priced, luxury-minded merchandise. Social attitudes regarding design are both an opportunity and a strategic constraint. Otherwise, social attitudes differ by international territory and must be adjusted to fit changing societal and cultural values. Environmental externalities are favourable, however it can represent higher costs in operations for IKEA. There is growing pressure, internationally, for businesses to reduce their carbon footprint and utilise technologies that are more eco-friendly. To meet these needs, IKEA has adopted greener technologies in its distribution service fleet to include hybrid vehicles. Honda Civic hybrids were used, vehicles with electric motors blended with conventional engines, to satisfy this international pressure (Reed 2007). Swapping out existing service vehicles with more technologically- and environmentally-sound autos is a budgetary issue, however it satisfies political and social pressure regarding more sustainable business practices. Other than autos, the technological environment in Asia, North America and Europe is favourable for improved information technology systems such as its reliance on Oracle and other software programmes. IKEA has the opportunity, and has taken it, to utilise growth in international consumer usage of the Internet as a marketing tool. The social web and availability of information technology specialists around the globe allowed IKEA to build a digital marketing centre online. Known as “Ask Anna”, an avatar allows consumers to run searches with an interactive character assisting customers with their online needs (Weber 2009). This gives IKEA more visibility for international target customers and represents innovation in customer service. Research did not uncover any legal issues that have brought significant concerns at the budget, operational, or reputational levels for IKEA. Basic compliance issues to regional and international laws are part of the regular business practices of IKEA and have been built into packaging and process models. For example, some stores offer restaurants and food services, therefore food safety, product testing and traceability must be considered to avoid regulatory problems (thebookshq.com 2009). These rules and regulations vary in intensity in each region, however compliance does not appear to pose any significant business risk or threat. IKEA works directly with the World Wildlife Fund and other organisations to ensure that production materials are not procured via illegal logging activities (thebookshq.com). In China and Russia, the company has hired many legal and forestry specialists to satisfy and avoid regulatory problems. Five Forces analysis for IKEA There is little to no supplier power in the supply chain at IKEA, due to the strict labour-related compliance measures and quality measures in place at the company (ikea.com 2009). IKEA has a very competitive supplier market and a good deal of the products procured are standardized. This represents a weak supplier market (quickmba.com 2010). IKEA has a well-developed standard for no child labour and will switch suppliers in the event of non-compliance. There is always a threat of substitutes that weakens the power of IKEA, as there are other low-cost supermarkets and furniture retail stores offering substitute products. The buyer’s inclination to substitute, which is quite low due to the quality marketing image IKEA has developed for its brand, is relatively low which keeps IKEA in more control. The costs of switching, at the consumer level, are relatively low which weakens their hold on international markets. Buyers, for the most part, are weak and this gives IKEA an edge. They are relatively fragmented markets, representing diverse lifestyles and cultural values, therefore there is no reliance on one particular segment to ensure same-store sales. The brand has differentiated itself through brand-building efforts and strong dedication to marketing excellence, therefore consumers perceive extra value in IKEA (cost and quality) which removes significant buyer power. There are virtually no barriers to entry from competition, as most developed governments support direct foreign investment. Growth in supermarket cash availability and ability to procure global supplies similar to that of IKEA weakens IKEA’s position as a competitive player. Asset specificity is high, involving the ability to use current assets to make and distribute new products, as production and procurement systems support international manufacture and distribution of do-it-yourself furniture products. This creates a problem with competition in terms of new market entry. Threat of rivalry is significantly high for the company, with growth in hyper- and super-markets carrying similar products and companies that are adopting the IKEA model for cost leadership and catering to the do-it-yourself customer segments across the world. Without consistent differentiation tactics, found mostly through marketing and innovation presentation of product, rivalry can seize market share quite quickly and it is something IKEA must consistently adopt and ensure flexibility in advertising and customer service features. Projections for IKEA future strategies The founder of IKEA, Ingvar Kamprad, will be retiring as active director of the company in 2012, passing the legacy onto one of his three sons. This exit of long-standing leadership will place IKEA in new leadership hands and will likely revamp some of the company’s existing corporate policies and long-term strategies. Implementation of a new five year strategy, upon Kamprad’s exit, is identified. Currently, IKEA relies heavily on advertising using its simple, yet detailed visual catalogue of products. It is the main focal point in communicating new product offerings and values to customers. However, as part of sustainable business practices, IKEA should develop more focus on the online environment both for cost-savings and to take advantage of Internet marketing to reach new Asian customers that now have access to a large-scale communications technology infrastructure. E-commerce in China, as one example, has grown by 1,000 percent since only 2001 (researchinchina.com 2010). This has come with growth in mobile technology providers and has given many companies new models by which to benchmark marketing practices over mobile devices. A recent survey of randomised Chinese consumers indicated that 73.8 percent of these buyers would prefer to pay online using debit and credit cards when making purchases (Suomi 2008). Only 28 percent preferred the traditional cash and carry method of consumer buying (Suomi). IKEA relies on its bricks-and-mortar retail stores in North America and Europe for its sales contribution, however Asian consumers seem to be turning toward more e-commerce such as the development of the TaoBao buyers network that contributes billions of USD to multiple retailers. Rather than relying on traditional magazines such as the company’s IKEA Family Live Magazine and the annual product catalogues, reaching Asian consumers through Internet marketing and stronger presence through mobile advertising is a step to transform IKEA for the next five years. Additionally, there is an international trend, in diverse target groups, to accept and utilise social media such as YouTube, Twitter and MySpace. They have become mainstream lifestyle elements as they provide user-generated content, allow for consumer opinion and blogging (Smith 2009). IKEA typically, in its bricks-and-mortar retail facilities, provides products to cash and carry customers internationally. However, research did not identify any significant marketing presence on social media websites and blogging networks. IKEA differentiates its business through innovation and design aesthetics and can continue with this trend in the social media environment. Growth in consumer opinion polling and websites has given international customers familiarity with offering product testimonials as part of post-purchase evaluation. This is a highly demanded feature on the Chinese TaoBao sales network and has become a staple feature when considering consumer decision-making. IKEA has tremendous opportunities to increase its social networking visibility by offering blogging and allowing video-sharing exchanges with satisfied consumers to tell their unique stories of how their lives have been enhanced through IKEA products. This represents low-cost word-of-mouth advertising that avoids the costs associated with catalogue production and complications that can arise from logging legalities associated with paper procurement. By hiring or transferring information technology specialists and managers, the content of these social media testimonials and blogging commentaries about IKEA can be regulated and content managed without significant cost. Kamprad established a strong cost leadership strategy at IKEA, with a focus on internal efficiency (academon.com 2004). IKEA’s use of Internet and mobile device marketing represents significant cost savings from magazine and catalogue production and adds more modern efficiency related to usage of technologies that are favoured by consumers. It is likely that this cost-efficiency and cost leadership strategy will continue at IKEA even after the departure of Kamprad. Growth in consumer awareness of corporate social responsibility and environmental sustainability also provides another opportunity over the next five years. IKEA can use the World Wide Web and press release marketing, over social media and reputable news websites, to inform customers of their business practices related to CSR and sustainable business. Global recognition of the plight of youth labourers has increased, and IKEA works continuously to prevent this from occurring within its supply chain (Dunne 2005). Using Twitter, Facebook and MySpace (among other Internet social networking sites) would allow IKEA to become more interactive and informative to a vast group of target audiences and would improve sales from consumers who make decisions about product purchases based on responsible business practices. IKEA needs, also, to ensure that “furniture is strong enough to accommodate frequent moves and young, rambunctious children” (Cook 2003, p.2). IKEA currently uses in-house displays to illustrate to consumers the product’s sturdiness and quality (Cook). Rather than relying on walk-in consumers, IKEA can further use online marketing tools, such as social media, to illustrate various product durability by giving consumers a virtual tool of their quality assurance and quality measurement practices. Interactivity is a worthwhile strategy, in a low cost technology environment, to give consumers videos of how their products are tested and how they can be applied to real-life living scenarios. IKEA can easily procure advertising consultants and production experts to film these in-house and consumer lifestyle videos and routinely share them with a growing international online audience. As the company will strive to differentiate itself from growing competition across the globe, having a stronger connection with the buying audience by positioning the company as a quality-minded organisation will guarantee higher sales and consumer interest from multiple international segments. Expansion has always been IKEA’s focus under Kamprad’s leadership and will likely continue as consumers favour the do-it-yourself, low-cost furniture products. However, shrinking international consumer incomes in a global recession will likely slow expansion efforts from the same pace that has been occurring over the last decade. IKEA is facing heavier competition from European supermarkets that are offering diverse product lines and also from retail markets that are starting to imitate the IKEA business model of low-cost, value-minded furniture (businessteacher.org.uk 2010; Craven 2010). There are high operational costs associated with new store construction and development that seems to negate some of the traditional cost leadership strategies currently in place under Kamprad’s leadership. There are opportunities to satisfy this cost leadership mentality and focus on the core retail establishments already in business. This can be done through integrated marketing campaigns involving more advertising devotion (using multi-media sources) and various guerilla marketing campaigns. Guerilla marketing is street-marketing that is in-your-face and generally tells a compelling story to random consumer groups. IKEA maintains the opportunity to create various scripts, using local, low-paid actors representing IKEA brands, to capture the attention of diverse consumer segments. Through partnerships or authority of regional officials, IKEA can spotlight their products in interactive or entertaining skits that show real-life or imagined lifestyle scenarios and how IKEA benefits the consumer lifestyle. Vouchers or other incentive marketing materials can be utilised, at low cost, to invite consumers to improve same-store sales without necessarily relying on costly operational expansion associated with new store development. Impact of Kamprad’s retirement IKEA has a well-developed operational and procurement model that has given it the position of being the number one furniture retailer internationally. Kamprad has managed to instill these values into the corporate culture in relation to frugality, cost leadership, responsible business practices and ethics, and also building more positive relationships with internal staff and management. The company’s annual report states, in relation to the internal culture and business mentality: “We believe in doing more with less, being humble by listening to and learning from others and being fair and honest” (ikea.com 2009, p.7). These are long-standing values that are part of the corporate culture and the basic principle behind the value-minded business model for IKEA. It is likely that these values will continue as it would involve a complete restructuring of the process models currently in place and would represent a completely different philosophy of corporate organisational culture. Employees and managers are hired with these values instilled immediately after recruitment. Over the next five years, Kamprad’s personal influence on his sons related to frugality will drive similar business practices. For example, Kamprad is one of the world’s most wealthy businessmen, yet he drives a decade-old Volvo and often travels economy class (timesonline.co.uk 2005). He has instilled these values into his sons associated with hard work, dedication and frugal living. Regardless of who takes on Kamprad’s legacy of leadership, it is likely these will remain the values of IKEA because of his dedication to these values and how he passed them to his children. It would be difficult for a leader to move into such a dedicated, frugal corporate culture and suggest changes that were more radical without considerable change management resistance. Kamprad’s stamp on the organisation will likely be a part of the company’s overall business methodology over the next five years. However, the largest problem the company faces is growth in competition and the ability to differentiate from other competitors that are rapidly adopting the IKEA low-cost model in order to take market share. The current specialties associated with Kamprad’s leadership, such as the ability to drop off children at the in-store playroom to maximise the shopping experience (businessweek.com 2005), will continue as customers have grown familiar and used to this value-added business practice. However, it is a changing of competitive positioning that will likely change some of the operational and service components of IKEA after Kamprad has departed for retirement. There will be a need to show customers how IKEA products add value to their lifestyles and personal needs as more competition is being experienced by even growth in European supermarkets. References Bettes, P. (2010). France and Russia cloud IKEA’s wholesome image, Financial Times, Feb 17, p.18. Burgess, S. (2008). 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