Ikea: Internal Analysis And External Environment Analysis
IKEA has a unique concept of providing flat pack furniture at an affordable price range. According to a VRIO analysis, it is seen that the product add value to customer by being very useful; designs are rare in the sense nobody has the design what IKEA has; the concept is not easily imitable as IKEA has managed to achieve the world leader in furniture status using their concept and IKEA is organized quite well to carry out the business so successfully. The valuableness of the product is determined by the democratic design (about.ikea.com,2020c) which includes function, form, quality, sustainability and low price. Rareness is again connected to the unique designs IKEA has which are not seen in other furniture manufacturers. Each year IKEA introduces 2000 new products to the market and currently has 9500 products in its range. (inter.ikea.com,2020b). Inimitability also considers the unique designs and the democratic design concept of IKEA which makes it difficult for a competitor to design similar products which can be flat packed at the low cost as IKEA produces them. Organization is structured into mainly three sections; IKEA franchising which involves the total franchising management; IKEA range and supply which involves the designing and supply of products and IKEA industry which involves the total manufacture of wooden furniture (inter.ikea.com,2020c).
Products made at IKEA are made to last for a long time. The IKEA test lab thoroughly tests the materials and products at the product development stage. All IKEA products comply with the strictest laws and regulations applicable in any IKEA market (inter.ikea.com,2020b). Sustainability is a key component at IKEA. The products they make are made using sustainable raw materials and with an effort to use minimum amount of raw material. Another strength is either keeping the manufacturing sites close to raw material supply regions or towards the sales cites and have distribution centres located strategically to reduce CO2 emissions in the value chain (inter.ikea.com,2020b).
External environment analysis
IKEA is in the retail industry and the external environment of the industry can be analysed using PESTEL analysis.
The political situation in all the countries in which retail companies such as IKEA is operational has a direct effect on the business. Operating in 42 countries around the world, the political stability of those countries affects the economic stability thus IKEA can obtain better sales and profits. In the past few years India and China has lowered its barriers to entry for foreign brands thus companies like IKEA had a chance to increase its presence in those markets (Pratap,2018). Also the political stability of the countries which the retail companies depend on its supply chain has a direct effect on their success. Also certain activities by the companies have brought world limelight towards them as a matter of political issues. In 2012, IKEA admitted that it used prison labour in East Germany during 1970s and 1980s for their production. IKEA publicly apologised for this but it brought in strong political controversy in the world (Shaw,2019).
Economic situation of the world directly affects any business with regards to its revenues and profits. When there is a recession, the purchasing power of the people decline, reducing the goods bought. During the 2008 economic recession, IKEA also found it difficult to obtain its targets and had to go for 5000 job cuts to keep the company afloat (Economictimes. indiatimes.com,2009). But IKEA managed to overcome the detrimental effects of the financial crisis by administering a new strategy. First is lowering operational costs by doing things such as travelling economy class and staying in moderately priced hotels; Secondly increasing production volume to get economies of scale; Thirdly by developing a better functioning supply chain and fourthly by empowering co-workers to make certain decisions and having a lean management structure (Cagler et al, 2012). A stronger US dollar can have negative effects on the purchasing of the goods especially in Asian markets. The product prices go up thus the purchasing power declines (Shaw,2019). Moreover, multinational companies like IKEAs revenues are always directly affected by exchange rate fluctuations as they operate in many countries. Also the price fluctuations in raw material such as wood and metal, used by IKEA has a detrimental effect on their bottom line (Dudovskiy,2019)
The social structure also has a significant effect on a business’s performance. “Know the local culture before opening your doors” is something every company should adhere to. (Frue,2018). IKEA does not print the same catalogue for every country. For Russia, once they removed the same-sex couple from their magazine since the country consider homosexuality as shameful. Also for Saudi Arabian catalogue, they removed women’s pictures (Frue,2018). The social trends have an effect on the purchasing of a company’s goods. Having a presence in facebook is a manner to keep brands connected to customers and discoverable (Pinto & Yagnik, 2017 cited in Jayasuriya & Azam, 2017). It is seen that many social media reviews for IKEA is just one star since the delivery of products is quite slow (Shaw,2019;Frue,2018). IKEA has completely understood people’s requirements and thereby have their stores open till midnight for flexible shopping; children’s play areas to keep the children away while the parents do shopping and even restaurants are there in stores.
Versatile websites is the trend now in retail business and also use of automation. The IKEA website is a remarkably versatile tool for any customer who is looking for IKEA products, the nearest store or any category of products according to price scale. It also offers online purchasing facilities (Shaw,2019; Frue, 2018).In retail fashion industry, the “virtual try on” facility is given to customers, as a means of augmented reality function (retail.kiwi,2020). At IKEA the stores are also automated to assist customers. Earlier customer has to select the product and go to the warehouse to pick it up themselves but now there are computer operated lifts that takes the code of the product and brings the product to the customer (Essays,UK,2018).
Environmental factors have a very strong effect on any business. Most recent example is the COVID-19 pandemic which affected the whole world. Many retail businesses were badly affected as they had to close their stores as a response. IKEA also closed many of its stores in several countries in response to the pandemic but more than that there have been many contributions done to the society by IKEA. IKEA is a member of COVID Response Alliance for Social Entrepreneurs of World Economic Forum. To coordinate support for social entrepreneurs they launched Covidcap.com, a searchable database of emergency funds available for both non-profit and for-profit entrepreneurs during the outbreak (ikeasocialentrepreneuship.org, 2020). IKEA has also granted €26 m to protect the health and livelihoods of communities, co-workers, suppliers and consumers impacted by coronavirus.
A new trend in retail industry is sustainability initiatives. IKEA is also so toward sustainability. They have invested more than $1 Billion towards renewable energy and to help poor nations to cope with the threat of climate change. The current year is targeted by IKEA to have all the energy used in their stores to come from renewable sources of energy. Moreover they are looking into sourcing all their cotton and wood from sustainable sources. (Pratap,2018).
Legal implications can be costly for any business unless not handled properly. Retail companies needs to obey all the laws in the countries they operate in. Especially labour laws, prevent child labour in their supply chain and maintain minimum wage requirements. There have been incidents where the IKEA furniture has fallen on people and caused harm –even death- which had led to law suits. Although these law suits were resolved the reputation damage it caused was considerable (Frue,2018)