Case Study: Analysis of IKEA’s Business Model, Competition, Global Strategy and Environmental Factors Using the PEST Framework
Number of words: 1599
IKEA is a renowned Sweden-based multinational retail company that focuses on do-it-yourself furniture, home accessories and electronic appliances. This essay will discuss how IKEA’s business model has evolved over time and how it has performed. The essay will then discuss IKEA’s main competitors and business environment using the PEST framework, before ending with a list of recommendations for IKEA to maintain its success in the US while expanding globally.
Section 1: Evaluation and evolution of IKEA’s business model concept
Initially, IKEA focused on lowest-price DIY furniture at sufficient quality, which allowed consumers access to affordable furniture which they could assemble on their own . However, the company was criticised for its poor product durability and poor design aesthetic. Since then, IKEA has invested heavily in product design and manufacturing, and now delivers affordable furniture at reasonable quality and design. The core aspects of IKEA’s business model are thus its affordable DIY products, simple Swedish design, and reasonable quality. In recent years, IKEA also offered excellent service and innovation through its products, which drove it to grow rapidly in the international furniture market. (Edvardsson and Enquist, 2011)
The company has changed the way consumers shop for furniture by turning a time-consuming, expensive and formal process into one that was more affordable, simple and fun. (Moon, 2004) IKEA did so through the use of affordably priced products, stylish catalogues, large and playful consumer showcase stores, and sleek Scandinavian design. (Khamis, 2016) This approach allowed beautiful design to be accessible to the mass consumer market. The advantages of such an approach were affordability, aesthetics and efficient setup and storage, while the disadvantages were a lack of durability and the time spent on constructing and assembling the IKEA furniture.
Section 2: PEST Analysis and Key Environmental Factors
Next, this essay will analyse IKEA’s business environment in order to better inform IKEA’s new strategies for dealing with competition and expansion. The following PEST analysis will be used to analyse the environmental factors impacting IKEA. Primarily, IKEA’s operations in different countries has presented specific political, economic and social sensitivities that affect IKEA’s supply chain, product branding and naming, and marketing, while new technologies represent both significant opportunities and threats for IKEA.
Foremost, in terms of political factors, IKEA has been affected by politics in terms of supply chain stability, regulation, political crises and product naming. IKEA’s operations remain reliant on political stability to ensure that the global supply chain remains reliable. IKEA also remains subject to regulation over safety and reliability of furniture, which may vary across different political jurisdictions. Political events such as Brexit have also caused IKEA to experience an increase in manufacturing and export prices due to the fracturing of the EU common market. Finally, IKEA has had to more carefully consider the naming of its products which have specific cultural or political connotations across different countries. For example, its Lufsig product was construed to have a name similar to a vulgarity in Hong Kong, and was used for a political protest against the Hong Kong government. (Ngai et al, 2017) This caused IKEA to launch initiatives to defuse the political tensions that arose as a result.
Next, in terms of economic factors, IKEA is set to benefit from the growing middle class in emerging markets such as East Asia, and may wish to diversify its operations away from the West given the sluggish recovery post -2008 in the US and EU. The globalization of the supply chain has also allowed IKEA to enjoy better production costs, as it has outsourced manufacturing to keep costs low.
In terms of social factors, IKEA’s operation in diverse multinational markets have led it to weigh tradeoffs in its marketing approach, when catering to countries with distinct social norms. For example, conservativism in Russia and Saudi Arabia led IKEA to remove same-sex couples and women respectively in their catalogues for those countries, but resulted in a backlash from their Western consumer market whose customers were more liberal in political beliefs. (Molin et al, 2012) IKEA has also had to deal with social backlash from the use of East German political prisoners to manufacture their products in 1980s. (Briskin, 2016) However, on the bright side, growing global interest in Scandinavian design and sustainability within the larger society has allowed IKEA to tap on these trends to drive growth.
Finally, in the area of technological factors, new technologies such as augmented reality, virtual reality and artificial intelligence present opportunities for IKEA to deliver more customised and experiential consumer experiences. Furthermore, IKEA is able to conduct on-site, on-demand manufacturing through advances in scalable 3D printing. However, IKEA has to be mindful of rising competition from white label manufacturers and copycats enabled through the technology of e-commerce.
Section 3: Evaluation of IKEA’s competition
IKEA’s key competitors are Walmart, Amazon and Ashley Furniture Industries. By revenue, IKEA’s 2018 revenue was USD $44.6 billion, which puts it behind diversified retail conglomerates such as Walmart (USD $500.3 billion) and Amazon (USD $207 billion), but ahead of pure-play furniture companies such as Ashley Furniture Industries (USD $4.7 billion). (Buehlmann and Schuler, 2009) These companies were selected because they represent a broad spectrum of furniture and home appliance providers. While IKEA is a pure-play furniture company like Ashley Furniture Industries, Walmart and Amazon may be seen more as aggregators of third-party furniture brands, with Walmart being more dominant in physical retail and Amazon being more dominant in online retail.
Their advantages and disadvantages in satisfying the value propositions of their customers will be evaluated according to the dimensions of affordability, product quality, branding, supply chain management, digital marketing and e-commerce. Foremost, for IKEA, the company delivers on strong branding and affordable furniture at reasonable quality, but needs to expand more actively in digital marketing and e-commerce sales, as well as the management of its supply chain, which is necessary to keep costs and prices low. Secondly, for Walmart, the company excels in affordable furniture and low costs due to its supply chain excellence, but needs to improve on its branding, digital marketing and e-commerce sales. Thirdly, for Amazon, the company is strong in its supply chain and e-commerce sales, but as it is an aggregator of several third-party furniture suppliers, it is weak in product quality, branding and digital marketing, and needs to improve those aspects. Finally, for Ashley Furniture Industries, the company is strong in branding and quality, but needs to improve its affordability, digital marketing and e-commerce.
Section 4: International expansion strategies to maintain customer value, satisfaction and loyalty.
As IKEA looks to maintain markets in the US while expanding to emerging markets in Asia and India, they should focus on branding, innovation, after-purchase services, premiumisation and localisation of marketing in order to maintain customer value, satisfaction and loyalty.
Foremost, IKEA should focus on branding by continuing to promote uniqueness of Scandinavian design rather than diversifying its product ranges, because diversification would result in brand dilution and a weakening of IKEA’s distinctive global brand. (Moon, 2004)
Secondly, IKEA should continue to innovate in order to maintain aesthetic appeal and functional quality. (Moon, 2004) IKEA’s chief weakness in its products has been their slightly inferior design and quality, which are typically not very durable when compared to those of their competitors. IKEA should therefore invest more actively in research and design to create products that are more durable and beautiful.
Thirdly, IKEA should Include better after-purchase services such as assembly and warranty guarantees. This may include having home assembly services at an affordable price point.
Fourthly, in line with the demand from the growing middle class in emerging markets, IKEA should launch a premium range of products that is more durable and luxurious, to cater to the upper-class tastes of the new middle class. (Moon, 2004)
Finally, IKEA should localise marketing to local cultural contexts and sensitivities as they expand. This may be done through the use of new technologies such as augmented reality and AI to provide better online customer experiences that are experiential and customised. Also, as shown by a 2007 study by Capdevielle et al, IKEA Sweden experienced success in catering its product catalogues to fit the tastes of the Chinese and French markets. (Capdevielle et al, 2007) Hence, while IKEA should not diversify its products, IKEA should adapt and localise its marketing to local contexts.
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