“PESTEL & Porter’s Five Forces analysis on

IKEA”

Course Name # Strategic Management

Course Code # 2205

Submitted To,
Wahidul Sheikh Shemon,
Assistant Professor,
Department of Management, BSMRMU

Submitted By,
MD. AL-AMIN
ID# MBA-2102006(2nd batch)
MBA in Textile & Appparel Value Chain.
National Institute Of Textile Engineering & Research.
Nayeerhat,Savar,Dhaka.

Submission Date- 20/01/2023

1 - Introduction

IKEA is definitely a store that comes to mind when shopping for furniture. Founded back in
1943, IKEA first started from humble beginnings from just a single store located in a city
called Almhult within Sweden. Unbeknownst to many, its founder Ingvar Feodor Kamprad
had an interest from a tender young age in establishing a business and started selling matches,
Christmas tree decorations and stationery accessories to his neighbours by couriering them
from his bicycle. The name IKEA was derived from Ingvar Kamprad starting initials (I.K.)
and the subsequent (E.A.) were taken from the first letters of his hometown where he grew
up, Elmtaryd (E) and Agunnaryd (A). (Ikea, 2014).

Presently worldwide, IKEA is currently renowned and recognised as the world’s largest
furniture retailer. With 351 stores spanning across 43 countries, it is no surprise that the mega
corporation is well respected in the furniture industry by both competitors and other
businesses alike. IKEA is widely known for their modern architectural designs for various
home appliances and furniture. Their interior designs are often accompanied with eco-
friendly simplicity. The firm is also known for their attention to details such as cost control,
operational details, relentless product developments and their constant emphasis on
delivering quality products at an affordable cost. These attributes portrayed by IKEA has
allowed them to lower their prices and appeal to consumers as a budget friendly store to shop
at.

IKEA Singapore was founded back in 1978 and their doors opened for business with similar
concepts to their parent company back in Sweden. IKEA’s vision and business concept aims
to create better daily lives for the majority of people and offer an ample extensive range of
functional home products that are superiorly designed and sold at prices both affordable and
budget friendly to the majority of people.

2 - PESTEL

2.1 Political Factors

According to Klapper, Amit & Guillen (2010), government effectiveness and political
stability effectiveness holds a strong relation to a stable business environment. Singapore has
been governed and politically ruled by the People’s Action Party (PAP) since 1959. The
transformation of Singapore from a third world to a first world country has been relatively
unquestioned stemming from the strong leadership of the leading political government and a
zero tolerance towards corruption practices. With the importance of survival for the country
as a whole due to its lack of natural resources, Singapore places great emphasis and
importance on the development of its economy. According to Singh (2012), Singapore’s tax
rate remains the lowest in comparison between Hong Kong and Macau even as the global
average rate across the world increased. Often termed as a “low-tax” haven with its low
taxes, multiple foreign investors and firms such as IKEA attracted by this scheme, flock to
Singapore to set up companies which in turn boosts the local economy as a whole.
2.2 Economic Factors

Gross domestic product (GDP) is used to measure the health of a country’s economy. A
country’s GDP has a direct correlation and impacts everyone within the range of the
particular economy. A healthy economy comes with returns of high employment rates and
increased wages of workers. Businesses also stand to gain and flourish from a positive GDP
growth. Singapore is revered for being a highly developed trade-oriented market economy
and has achieved the highest trade to GDP ratio in the world. Singapore has also been ranked
worldwide as the most open and pro-business and least corrupt according to international
polls. Trading Economics, (2010), showed that GDP in Singapore has expanded an
annualised 3.10 percent in the third quarter of the year 2014 over the previous quarter. GDP
growth in Singapore also averaged 5.21 percent from the year 2007 to 2014 and had reached
its highest peak of 36.40 percent during the first quarter of the year 2010 (Trading
Economics, 2010). This being said, the advantages and lucrativeness of doing business here
are in the favour of IKEA and other foreign entrepreneurs alike.

2.3 Social

Singapore holds an ageing population that could pose problems for its economy and
workforce. Locals are living longer due to the increasing quality of healthcare. However,
couples are not having enough babies to replace themselves according to statistics provided
by the Department of Statistics Singapore, (2014). This would pose problems towards the
older generation due to them not being able to receive the care of the younger generation, for
example, immediate family members such as children and next-of-kins. With the nature of
IKEA’s business model of providing high quality products at low costs, senior citizens are
able to purchase safety proof products for their homes such as door stoppers and anti-slip
strips as well as other furniture additions as and when required in the case of wear and tear
without putting a financial strain on their wallets. This typically increases the revenue of
IKEA and lists them in a favourable image as compared to other typical furniture companies
that do not hold the same standards in place.

2.4 Technological changes

Technological advances throughout the world have improved tremendously by leap and
bounds in contrast to the past. Presently with all the modern technological advances we have,
many companies have used technology in some way or another to remain competitive in
delivering the cost of their products and providing services to their customers. According to
Environmental Leader (2010), IKEA has incorporated the usage of solar panel in some of its
retail stores and will continue to keep up the installations on their other business units in the
coming years. This course of action would enable them to save up the cost of utilising
electricity from paid sources and in return avoid pollution from carbon emissions which
would maintain the company’s image of keeping their promises as an eco-friendly company
thus promoting both a positive and righteous image to their target consumers which would
generate positive publicity and popularity.
2.5 Environmental

IKEA holds a high regard for being an eco-friendly company. In addition to eliminating the
usage of plastic bags around its stores in the year 2008, IKEA has also incorporated a special
policy in place for customers who have made purchases of their products and wish to return
certain types of wastes such as packaging, batteries and low energy bulbs back to their stores.
The store would then collect the “wastes” and think of a viable method to either repair or
recycle the product to prevent wastage in the interest of conserving the natural environment,
IKEA, (2014). With this measure in place, IKEA’s corporate responsibility is placed at a
high level.

2.6 Legal

Legal implications of the actions and policies of local governments could have a significant
impact and possibly cripple a company. The Singapore budget 2013 was aimed at imposing
higher levies and restricting the quotas of foreign workers in a bid to lessen the population of
foreigners within Singapore. (Ministry Of Manpower, Budget 2013). With the increase of
foreign worker levies and quotas, many enterprises are experiencing a labour crunch due to
the shortage of manpower. These implemented measures could increase the costs and
expenses of enterprises which could spell disaster for businesses relying on cheap foreign
labour. If this worst case scenario were to happen, the economy could suffer a toll and IKEA
along with other enterprises would be affected inadvertently with results of lower profit
margins and higher unemployment rates.

3 - Porter’s Five Forces Model

3.1 Threat of new entrants

Profitable markets with outputs of high returns are attractive head turners to fresh new
entrepreneurs and other companies looking to expand in the targeted market. The threat of
new entrants could have a direct impact on all existing industry players big and small alike
and also bring along a decrease in revenues for existing firms. However, according to
Bennett, et.al. (2013), 40% of new entrants exit within the first year and another 34% exit
within the second. With such slim survivability, new entrants and other companies looking to
expand are likely to enter with caution. In the case of IKEA, new entrants vying to be a
discounted furniture retailer on a global scale are highly inconceivable due to the current
saturated market which involves heavy financial investments and essential expertise.
Therefore it can be said that the threat of new entrants posed to IKEA is relatively low.

3.2 Threat of substitutes

Substitutes are products that are either similar or identical. An example of substitutes
would be that if the cost of Coke were to have a sudden significant rise, consumers would be
more likely to switch another alternative such as Pepsi. Pepsi would then be a substitute to
Coke. According to Gupta (2014), buyers are more prone to accept prices of products if other
alternatives are not readily available or if the existing qualities of substitutes are not
satisfactory. In the case of IKEA, targeted consumers are highly unlikely to switch to higher
end alternatives due to the stiff market and lack of competitors. Therefore the threat of
substitutes is relatively low as there are little alternatives that offer the product ranges and
costs that IKEA offers.

3.3 Suppliers

Suppliers have the potential to affect outputs of a company by increasing cost inputs. Despite
this, suppliers do not hold much bargaining power towards IKEA due to there being
numerous other alternatives available worldwide. With technological advances around the
globe, numerous factories now have the required expertise to form a partnership with IKEA.
However, according to (IKEA, 2014), IKEA is committed to establishing long-term strategic
partnerships with their suppliers. Therefore it could be stated that the threat of suppliers is
relatively low due to the circumstances of the suppliers and as mentioned IKEA’s corporate
credo the fostering of close relations with suppliers of their products is of great importance to
them.

3.4 Customers

Customers hold high bargaining power due to intense rivalry and stiff competition between
IKEA and its rival counterparts. According to the UK Customer Insights report stated by
Verdict, a case study of customers of IKEA in the UK showed that IKEA’s customers aren’t
satisfied with both the company’s products and services and are purchasing products from
other companies. In addition, IKEA was reported and accused of putting low waged
employees in unsafe working conditions as stated by Szkotak, (2011). With such negative
publicity that is circulating, damages could be brought about on IKEA’s brand reputation and
the outcome could result in the existing customers’ crossing over to competitors for their
product purchases. This could bring direct consequences to the firm both in the form of losses
in profit margins and the lost of loyalty from existing customers.

3.5 Rivalry

Even with the saturated market and the low threat of new entrants in the world of global
discounted furniture, rivalry in the furniture market is intensive. Competition between IKEA
and other existing major players in the industry such as Home Depot, Wal-Mart, Argos and
others are mainly due to the similar traits that they share with IKEA, with factors such as
low-cost products, huge market presence and a well-managed supply chain. With such similar
traits, competitors could very well stand to gain a piece from the market share of IKEA by
providing superior products, lower costs, better service standards and grabbing over existing
IKEA customers through publicity gained from advertising. Therefore, it could be stated that
even with the minority of competition the threat of rivals is still relatively large at the same
time.
4 - Strategic Recommendations

4.1 Social Factors

With IKEA’s position in a well-constructed economy such as Singapore and with only 2
operational stores running, An increase in the number of stores would definitely bring about
attractive benefits to IKEA such as generating an increase in their customers’ baseline. IKEA
should capitalise on attracting potential working class consumers who are busy with daily
hectic schedules by placing new stores in strategic geographical locations. This strategy
would bring about satisfied customers who have specific preferences of viewing products
based on actuality instead of ordering them from an online catalogue and would also increase
baseline customers.

4.2 Legal

Costs and expenses of IKEA should be looked into and put into reserves whenever possible.
By saving up on costs, IKEA would be able to rely on their financial reserves in the
unfortunate event of a crisis, and would not have the need to retrench their valuable staff.
Employees are the core of a company and should be retained as much as possible due to the
current labour crunch in Singapore and be continuously rewarded accordingly to their merits
in recognition of their efforts to keep them satisfied.

4.3 Customer

IKEA could stand to gain from incorporating a company image strategy by using their
resources to highlight more positive images of their company. Positive publicity could be
brought about and generated by taking up of more corporate social responsibility projects,
examples include building of schools for the needy in local communities that are living in
poverty and also caring for the environment by engaging staff to undertake voluntary work
such as cleaning up of public areas, if this strategy is incorporated successfully, it will
overshadow the negative publicity that they have received.

4.4 Rivalry

By providing a diversity of their product line and depth, IKEA would stand on a level higher
than their competitors, and consumers would be provided with more alternatives to choose
from. Organizational restructure could also be looked into to increase the quality of service
standards provided to customers to keep them both satisfied and happy. IKEA could also
benefit from a diversification of businesses stemming from an established positive brand
image due to their long standing reputable name in the industry. By looking into
conglomeration, more profit revenue could be generated by expanding into different lucrative
markets such as information technology, consumer electronics and telecommunications.
However, more research would have to be conducted due to issues they could encounter such
as the lack of knowledge to efficiently run disparate business units.

5 - Conclusion

In conclusion with all the information above, even though IKEA is currently standing as the
leading brand name in furniture through their constant innovations, the company should not
be complacent about their position or it could ultimately lead to losses in profit margins and
the company’s downfall in the worst case scenario. More emphasis and focus should be
directed on improving their service standards and generating more positive publicity in a bid
to retain customers’ loyalty and increase their customer baselines. The quality of products
should also be looked into to provide the company with a competitive advantage over their
rival counterparts. Due to the limitations of this research, this report would have greatly
benefitted from the research of higher valuation of the company through fruitful labour by
exploring behavioural strategies of employees and employers. What is clear-cut however is
that if these strategic changes are implemented with positive results, the standing of IKEA in
the business market would be heightened to a whole new level.
Gupta, A. (2014). GLOBAL BUSINESS ENVIRONMENT AND INTERNATIONAL
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