Analysis of the General Environment of IKEA Company

Subject: Company Analysis
Pages: 6
Words: 1648
Reading time:
6 min
Study level: Bachelor

Summary

IKEA is an international company that deals with the sales of furniture. It was founded in Sweden, and its headquarters is in the Netherlands. The firm designs and sells kitchen appliances provide home services, and assembles furniture products. The organization is one of the largest furniture retailers in the world. Its reputation is based on the type of equipment it offers and interior design services, and other different commodities it provides in the market. It has been involved in product development, enhancing its market cost control. Like other business organizations in the industry, IKEA is impacted by its general environment in a number of ways. External and internal surroundings significantly influence the company’s decisions and performance. There are various sources of environmental factors that play a vital role in IKEA’s overall growth. They include political, social, technological, and economic aspects. Understanding the elements is crucial for the management of IKEA Corporation so that they can properly comprehend the happenings in the markets around the globe. Analysis of IKEA’s general environment is essential in enabling the company to distinguish important factors from less vital ones.

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The success of a business organization is majorly contributed by its relationship with the external environment. In order for IKEA to generate continuous revenue in the market, the firm must provide products with value to its consumers. In order to achieve this, IKEA’s management board should understand the needs of its clients accordingly to ensure they meet their demands. Similarly, it is necessary for IKEA to create value for its suppliers in the market since it obtains goods and other services from vendors (Grant, 2016). The company has to develop a cordial relationship to manage its business ties to gain from the providers. Lastly, IKEA has to comprehend the existence of competition in the market for furniture. The company’s management team should embrace the stiff scramble from other firms which are seeking limited opportunities in the sector. By acknowledging opposition in the industry, IKEA will be able to strategize its operations effectively in order to make more income. Based on this perspective, the core business environment is made up of consumers, suppliers, and competitors.

General Environmental Factors Influencing IKEA

The industry determines firms’ decisions and strategies by political, social, economic, and technological impacts. These aspects can contribute to the corporation’s opportunities or threats which influence its future performance. The effects generated by the factors have a significant effect on the business operation strategy. Therefore, a proper understanding of the macroeconomic elements is vital in making choices related to IKEA’s business activities in the global markets.

Political Environment

Political factor is a great influencer on how the business will conduct its operation in the market where it tends to venture. Some governments induce technical restrictions that make companies spend more cash to attain the requirement hence leaving them with reduced profit margins (Grant, 2016). IKEA faced several complications as a result of governmental regulations that made it a challenge for the firm to prosper in that market. IKEA understood the Indian government, and thus it formulated strategies to enable it to operate effectively in the environment.

Social Factor

The social aspect is a vital environmental consideration that has the potential to either increase or reduces the profitability of an organization. People have different values and beliefs, which makes it challenging for the company to meet their needs. Therefore, it is necessary for IKEA to have deep insight into the norms and standards of the customers it intends to sell its products and services (Agrawal et al., 2021). In most cases, business organizations tend to diversify their products so that they can meet the tastes and preferences of potential clients. IKEA has been embracing diversity to ensure it remains relevant in the market.

Economic Environment

The economic factor is another perspective of IKEA’s general environment that greatly influences its overall performance in the industry. Economic stability impacts the nature of consumer spending; thus, it is important for the business organization to formulate proactive measures to ensure customers receive quality products at affordable prices. For example, during and after the great recession, the markets were crushed, and people had limited sources of income. IKEA decided to charge their wares conservatively so that any person who is willing to purchase the product at a lower cost would think of the company as the ultimate solution to budget constraints. The firm maintained its style and fashion but lowered the cost of buying the products to encourage buyers.

Technological Environment

The rapid development in tech has contributed to the success of most business organizations in the market. IKEA has been at the forefront of ensuring it increases customer satisfaction by ensuring it has an active website platform where it can easily display its products. Technology allows consumers to assess the products in their location and thus can make a decision to purchase. Online and eCommerce are effective in promoting the sales of furniture and other IKEA products. Customers can search for all categories of commodities offered by the company based on prices or types, making it more convenient and satisfying for the clients (Rhee, 2018). Therefore changes in technology are a concern that requires the management to consider during the business operation.

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Porter’s Five Forces Analysis of IKEA Company

Porter’s Five Forces is a framework model that enables firms to deconstruct the overall structure of the industry into key critical competitive forces. The tool uses five variables to explain the competitive nature of the sector. The sources of pressure are industry rivalry, the bargaining power of buyers, supplier power, the threat of substitution, and the threat of new entrants. The model evaluates the profitability of the business organization in relation to the five forces that influence competitiveness. Generally, the strength of each force is determined by a number of factors in the market. A firm should properly examine the competitive pressure to ensure it understands its main cause of profit or underperformance in the sector.

Industry Rivalry

The level of a firm’s rivalry in the industry determines the competition rate in the given market. Aggressiveness in competition influences the profitability of the companies in the sector. IKEA faces intense rivalry with other large and well-established corporations that offer similar services and products to the people (Wicaksono & Kadafi, 2020). Competitors such as Agros impact the furniture market, making IKEA experience strong opposition (Grant, 2016). There are also supermarkets and small-scale retailers that provide the commodities to consumers making the number of players in the market high. The existence of many opponents prompts IKEA to strategize its activities in order to remain a top performer in the industry.

Bargaining Power of Buyers

Consumers in the market for furniture are informed and price sensitive. The buyers have in-depth information about the different brands of products available in the market, making them more rational while purchasing. The existence of more sellers in the industry allows them to switch easily from one firm to the next. These factors give them higher bargaining power over the companies in the market. Therefore, they have the potential to lower the prices of commodities in the industry. Similarly, customers do not incur any cost of changing buying points; hence they can purchase products from an organization of their choice. To remain relevant in the market, IKEA has been selling its goods and services at relatively low prices.

Suppliers Bargaining Power

The industry of furniture and home appliances contains many companies that require raw materials. This aspect gives suppliers in the sector a higher bargaining power since they can easily sell their materials to both local and international markets. Similarly, wood, which is the key raw material, is very scarce in supply, giving vendors the advantage of bargaining with firms over prices. IKEA understands the dominance of the suppliers; thus, it has established an effective relationship with them to enable the company to obtain resources at reduced costs.

Threat of Substitution

There is no close substitute for furniture in the market, which gives the firms an advantage due to the insignificant pressure of substitution. Most companies have adopted the technique of making different designs to improve customer satisfaction. IKEA makes wares of various quality and materials in the industry to ensure its clients are attracted to its products. Consumers in the market are price indifferent because they have to buy the commodities at the prevailing prices since there is a substitute they can use. IKEA is not suffering from the aspect of other items; hence its strategies to remain profitable are not impacted by the threat of substitution.

The Threat of New Entrants

The furniture market does not contain many hurdles that can restrain other players from coming into the industry. Skills, capital requirements, and regulations are limited, making new firms’ entry into the market easier. Despite the ease of entering the sector, IKEA uses other strategies such as product differentiation to keep it competitive amongst the incoming firms. The presence of many players in the industry lowers profitability, which prompts effective measures to curb the effect (Agrawal et al., 2021). The limited requirement in terms of labor and capital makes the threat of entrance a strong force determining the level of competitiveness.

In summary, the overall operations of business organizations are significantly influenced by the environment in which they are located and operate. In different ways, IKEA is impacted by social, economic, political, and technological factors determining its performance and profitability in the industry. Firms in the furniture market experience a high rate of competition which requires them to understand the sources of pressure in the sector. Some of the forces that determine the profitability in the industry include competitive rivalry, the bargaining power of both buyers and sellers, the threat of entrance, and competitive substitution. These forces indicate areas where IKEA’s management needs to improve to ensure they gain from a market full of strong opponents.

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References

Agrawal, G., Chhikara, R., Garg, R., & Ahmed, J. U. (2021). Pepperfry: Challenges ahead with growing competition in the Indian home furnishings market. SAGE Publications: SAGE Business Cases Originals.

Grant, R. M. (2016). Contemporary strategy analysis (9th ed). Wiley.

Rhee, P. (2018). Beyond green: Environmental building technologies for social and economic equity. Architectural Design, 88(4), 94-101. Web.

Wicaksono, P. A., & Kadafi, C. A. (2020). The improvement of the production process impact in furniture industry toward a circular economy. In E3S Web of Conferences (Vol. 202, p. 07052). EDP Sciences. Web.