Introduction
It is necessary for a business to have an appropriate system to detect trends and changes in the industry where it competes in. This is because the competition in all business sectors starts to be very aggressive in recent years. This influences firms in all industries to examine and understand internal and external market environment. This drives companies to examine the market environment where they operate in. By using appropriate business systems to examine market environment, this does not only allow the company to see the changing market condition, but it can also enable the firm to develop appropriate strategies to prevent threats (French, 2006). At the same time, this will enable the company to fit into the new environment. The main focus of this study is to examine external and internal market environment of IKEA by using SWOT, PESTEL and Porter’s five forces frameworks. Thus, brief information about IKEA will be provided before going into detail.
About IKEAhttp://www.sacc-sandiego.org/files/media/IKEA%20logo.jpg
Source: http://www.sacc-sandiego.org/files/media/IKEA%20logo.jpg
IKEA is one of the leading international furniture companies with many branches in many countries around the world. IKEA is a Swedish-based home products retailer that manufactures and sells home accessories, flat pack furniture, bathroom products and kitten items (IKEA, 2010). The company sells and markets these products in all of its stores around the world. The company was founded in 1943 by Ingvar Kamprad (IKEA, 2010). Low pricing strategy is a main factor that drives customers to shop for home products in stores of IKEA. Other than home futures and products, customers can also enjoy a good quality food in the on-site restaurant which serves traditional inexpensive Swedish dishes like Swedish meatballs and lingonbery jam. The on-site restaurants of IKEA open daily before the business hour of the furniture outlet. The good part of its on-site restaurant is that it provides free refills of tea, coffee and soft drinks. Today, IKEA is the world’s largest furniture retailer that market home products.
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SWOT Analysis
SWOT refers to ‘strengths, weaknesses, opportunities and threats’ (Hannagan, 2002, p. 93). Strengths and weaknesses are internal factors of a business. The company must know them and use them to its advantage. On the other hand, opportunities and threats are external factors that the company cannot control. However, if these external factors are well monitored and detected, the company will be able to develop new tactics to adjust itself into the changing environment. This section aims to examine SWOT analysis of IKEA.
Strengths
Strengths refer to internal factors of a business that make it competitive and different from others in the same industry.
IKEA does not only sell quality and well-designed home furniture and products to customers, but it also has an on-site restaurant where customers can enjoy a meal together.
IKEA uses a low pricing strategy to grab the interest of customers. This effectively draws the attention of customers. This is because many people are now very-price sensitive (Iglesias & Guillen, 2004).
It develops a strong brand for its home products. This helps it differentiate it from rivals in the same industry like B&Q and Homebase. When people think of home products, they think of IKEA.
It uses sustainable development strategy as the core business practice. Home furniture and home products of IKEA are made from sustainable resources (Ikea: not Sweden’s only quality company, 2006). The company also has a forest plantation to make sure that it effectively achieves this core business tactic.
Weaknesses
The location of IKEA’ stores are outside the city center. Most of these locations are far from the reach of the public transportation. Thus, this makes it difficult for customers with their own cars to shop at IKEA.
IKEA has to work hard to ensure that it meets the economies of scale. Thus, it has to move its production overseas. This makes it is difficult for the company to ensure that it is a green organisation. This is because it has to use airfreight and sea freight to ship their products (Reynoso, 2009).
Low pricing strategy of IKEA cannot be used as the main tactic to sustain the competitive position. This is because it can easily be copied by others.
IKEA runs food market. Many of its fresh food offers can be perishable if they do not get sold on time. Therefore, it could reduce the profit margin of the company.
Opportunities Matrix
Make its online deals and offers attractive. IKEA may give a free delivery to customers who make a purchase online or those who make a certain amount of purchase.
Develop new promotional deals and offers that would increase sale volume of IKEA during the credit crunch (Mintel, 2008). This should also help it to compete against online home products providers.
Seek local and domestic providers in the UK or European Union geographical block to supply materials for IKEA. This should help it further reduces the level of carbon emission in its business operation.
IKEA should eliminate fresh food market business to reduce the operational cost.
Figure 1: Opportunity Matrix of IKEA
Success Probability
Attractiveness
Low High High Low
2
1
4
3
Source: Kotler, P. 2003, Marketing Management, Prentice Hall, New Jersey.
It can be assumed that an opportunity in cell 1 should be considered by IKEA first. On the other hand, opportunities in cell 2 and 3 should be monitored in case they develop as a good business option for a great profit. An opportunity in cell 4 might be ignored. However, the main point here is that it is important for a business to see and identify new business opportunities before others as they can take many forms.
Threats Matrix
The recession makes many people become unemployed. This in turn reduces the buying confidence and spending power of customers. Thus, they may look for cheaper home products like secondhand home furniture and products from other stores.
The development of web and internet technologies makes it easier for customers to look for affordable home products from other providers like eBay and Amazon (Mintel, 2008).
The UK government urges local business to take a green marketing approach by using and buying materials from domestic providers. This is to reduce the carbon emission during the transportation activity. This will make it hard for IKEA as it has forest plantation overseas.
There are many competitors in the market. Thus, low pricing strategy and promotional offers cannot help IKEA to sustain its competition in the market. This is especially true if the current difficult economic condition has a long-life span.
Figure 2: Threat Matrix of IKEA
Probability of Occurrence
High Low
Seriousness
Low High
2
1
3
4
Source: Kotler, P. 2003, Marketing Management, Prentice Hall, New Jersey.
It can be assumed that a threat in cell 1 is the one that the company should concentrate on first. Threats in cell 2 and 3 should be tracked and monitored to see its development. In contrast, threat in cell 4 is minor and it could be ignored.
It can be seen that SWOT analysis should be used along with other external business environment analysis. Thus, PESTEL and Porter’s five forces models will be used to support the analysis.
PESTEL Analysis
PESTEL refers to ‘political, economic, social, technology, environment and legal’ (Dibb & Simkin, 2001, p. 264). These are external market environment forces that have can affect the strategic position and reduce profit margin of a business. However, a firm cannot control these forces. Thus, it is necessary for a firm to develop and set an effective system to monitor the development of these trends.
Political
In recent years, countries in the same geographical block create a competitive position for their local businesses by developing a business integration area. The European Union is one of the examples of business integration (Fraser, 2005). As IKEA is a Swedish-based company, this makes it easy for the company to enter the UK. However, this will make it hard for IKEA to enter other markets outside Europe. This is because countries in other geographical blocks also start to form business integration like NAFTA and ASEAN.
Under the leadership of Gordon Brown, the UK has been seeing many new policies on taxation (Rae, 2008). This is part of the tactics to get through the recession. However, these new policies do affect the profit margin of many businesses.
Economic
The recession does not only reduce the buying confidence of customers, but it also affects the competitive position of a business. This is because many companies cannot get through the turbulent time. Therefore, they decide to make workers redundant. This also makes many people become unemployed. At the same time, people who manage to keep their jobs, they are unsure about their financial circumstance. Thus, the current economic crisis will influence customers to become price-sensitive as they want to save as much as they could (Special issue on the global credit crunch, 2008). This means that IKEA should expect to see a decline in sales and profits as customers may look for home products and furniture elsewhere. They may also put their home furniture and products on hold. This is because they may feel that they are not the urgency purchase.
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The credit crunch first took place in the North American and European markets. This makes major monetary currencies like the Euro, US Dollars and British Pound Sterling weakening (Plagnol & Scott, 2009). However, the recession may have a long-life span as the global market is hit by another sudden economic crisis wave when the Dubai World asked for the extension to repay their debt of £35 billion (US$59 billion). Thus, this reduces the price of gold decline rapidly (BBC, 2009). Therefore, the current difficult economic conditions is likely to have a long-life span as the Middle East market, specially United Arab Emirates is a main global market for oil and natural gas. Without a doubt, this will make it hard for IKEA to sustain its low-pricing strategy. This is because the operational costs like transportations and materials will be increased.
The credit crunch does not only reduce the disposal income and buying confidence of customers, but it also affects the credit leaning confidence of banks and financial institutions. Thus, many banks start to use a tough stance on their credit lending policies (Keasey & Veronesi, 2008). This will make it difficult for IKEA to borrow credits for any business expansion project.
Social
People in these days start to use price as the main factor to make their final decision when they buy a product or service. They want to get more from what they pay for. This changing behaviour is driven by the recession (Carrigan & Pelsmacker, 2009). Thus, this may make people become even more price-sensitive when they make a decision to buy products that are perceived as non-urgent. This means that it may affect the strategic options of IKEA as it may need to drop price further to attract customers.
People start to become health-conscious. They want everything they buy and consume to be made from environment-friendly sources. This will creates a competitive position for IKEA as it is already taking up a green marketing approach. At the same time, it could give a new business opportunity for IKEA. This is because it could consider seeking new source for cotton and fabric to produce soft toys and other products.
Technology
Web and internet technologies start to become popular among customers. They start to use the internet as the main source of information. Evidence from Mintel (2009) also indicated that in recent years, many people start to use the service of online or home shopping. This is because it is convenience. However, the internet shopping of IKEA is rather limited. This is because some products of IKEA are not available for sale in its online store.
The internet and web technologies are important to competitiveness of a business. This is because using new technologies to support the business operation can help the company to reduce costs. New technologies can help a business to promote and market products in other countries with minimal barriers. Also, with the internet support, a company is able to run a business 24/7. However, in the case of IKEA, the internet does help it to promote its products in many countries around the world. At the same time, its product designs, concepts and ideas can easily be copied by other companies. It is revealed that many companies in China start to copy the designs and concepts of IKEA’ products (China teaches IKEA limits of homogeneity, 2009).
Environment
The recent talk on climate change in Copenhagen in December 2009 between countries showed that the governments around the world will urge companies in their nations to take up a sustainable development approach (Times Online, 2009). This will not be difficult for IKEA to do as it is already practicing a green marketing approach.
Apart from the government, the publics also pay a lot of attention on global warming and climate change. This creates an opportunity for IKEA to use its green marketing approach to create a differentiation point and good image towards the company.
Legal
The current difficult economic conditions make it hard for businesses to sustain their competitive position. Thus, many of them make a decision to lay off workers. However, with the employment law developed and introduced by the Labour Government, it is hard for companies to lay off workers without any appropriate redundant package (Sargeant, 2000). It also requires workers to give a fairness at work and healthy and safety workplace for employees.
Porter’s Five Forces Analysis
Porter’s five forces model is a framework to examine the competitiveness and attractiveness of a business industry. The concept of Porter’s five force model can help a business to determine whether it should leave or further put forwards the investment into the industry (Porter, 2000). The attractive industry should be the one where all of these five forces create a pour competition. On the other hand, the industry where all of these forces reduce the competitiveness and profit margins of businesses. Porter’s five forces analysis of IKEA can be explained below.
Barriers to Entry
The barrier to enter home furniture and products industry is rather high. The market is controlled by leading companies. In other words, larger players like B&Q and IKEA have a large market share.
Players in home furniture and products market understand that there is a high competition. Thus, they use a different market position to attract customers. IKEA positions itself as soft-approach home furniture, while it key rival B&Q represents as a hard-approach home products provider.
The competition in home products and furniture is rather fragmented. This is because large players like IKEA and B&Q do have a power to overwhelm the market. However, smaller players tend to use a low-pricing tactic to lure customers during the recession (Young, 2009).
Large home furniture companies like IKEA, Homebase and B&Q tend have a power to purchase a good site for their stores.
Threat of Substitutes
The threat of substitutes in home products industry is rather high. The development of web and internet technologies create a good business opportunity for small and medium sized companies as well as individual to sell and market cheap quality home products on the internet (Mintel, 2009). Customers can now buy secondhand home products and furniture on online marketplace like eBay and Amazon.
Other small and medium sized home furniture and products providers, customers can also buy them from other large companies with both offline and online presence like DFS, Argos and Tesco Direct. These home furniture and products providers can offer a good payment scheme for customers to suit their financial circumstance.
There are many small and medium sized home furniture companies that do not sell and market their products directly to final customers. However, they allow buyers to purchase home products at a discounted price. This is widely known as a ‘Factory Sales’. These companies also offer a made-to-order service in order to deliver a specific demands and needs of customers.
Supplier Power
Supplier power in home furniture and products market is rather low. This is because the competition in this segment is high. Thus, many suppliers only focus on developing and selling products and materials to home furniture companies.
Suppliers of home furniture and products work hard to keep a good relationship with their business buyers. This allows them to learn more about the specific demands and needs of final customers. This enables them to increase their sales and profit margin as their offerings meet the demand of the market. IKEA’ suppliers only sell it materials from sustainable resources.
Buyer Power
Buyer power is high. This is because customers tend to switch home furniture brands and turn to buy home products from other providers that give them a better deal. This is partly because of the recession which reduces the buying confidence and power of customers.
Branding is a good strategy for home furniture and products to create a differentiation. However, this only works with some customers. This is because many people are price-sensitive. These people do not care about the brand of their furniture. This is because it is not something that can effectively show off their social class (Mintel, 2008).
Competitive Rivalry
Competitive rivalry of home furniture and products industry is high. The market is rather fragmented. There are many players in the market. They attempt to create a differentiation point by using various marketing strategies. Some use a low pricing strategy to attract customers, while some firms focus on branding.
The competition in home furniture and products is aggressive. Thus, a differentiation point is necessary. IKEA creates a differentiation point by developing an image of soft-approach home furniture and products provider. This also reflects in its product lines. Other than selling hard approach home products like textiles and beds, but also markets soft baby toys and pillowcase.
To attract customers, many home furniture and products retailers like Argos and DFS offer a good repayment scheme to suit financial circumstance of individual customers.
Conclusion
It can be concluded that the competition in home furniture and products industry is very aggressive. Also, many external marketing environment factors have an impact on the profit margin and competitive position of IKEA. Of all external market environment factors, economy has a great impact on its profit earning ability. This is because the current economic condition does not only have an impact on a sale volume, but also the buying confidence of customers. At the same time, the development of external marketing environment factors does represent some good business opportunities for IKEA.
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