Impact of Macro Environment on IKEA's Strategy

This report analyzes the impact of macro environment on IKEA's strategy and evaluates its internal capabilities using frameworks like PESTLE analysis, RBV framework, and VRIO framework.

Business Strategy

Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Applying appropriate frameworks analyse the impact and influence of the macro
environment on a given organisation and its strategies...............................................................1
TASK 2............................................................................................................................................4
P2 Analyse the internal environment and the capabilities of a given organisation using
appropriate frameworks...............................................................................................................4
TASK 3............................................................................................................................................7
P3 Applying Porter’s Five Forces model evaluate the competitive forces of a given market
sector for an organisation.............................................................................................................7
TASK 4............................................................................................................................................9
P4 Applying a range of theories, concepts and models, interpret and devise strategic planning
for a given organisation...............................................................................................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
IKEA was founded in the year 1943 by Ingvar Kamprad in Delft, Netherlands. The company
deals with offering a wide range of home furnishing products to a large customer base. In the
following project report, an attempt has been made to understand the impact of macro
environemnt of IKEA on its strategy and analyse the internal capabilities of the organisation. The
report also aims to evaluate the competitive position of the company in the industry and help the
managers in devising intensive and generic strategies for improving the business performance
and position in the industry.
TASK 1
P1 Applying appropriate frameworks analyse the impact and influence of the macro environment
on a given organisation and its strategies.
IKEA is one of the most reliable and trusted ready-to-assemble furniture and home
furnishing product manufacturer which was founded in the year 1943 by Ingvar Kamprad. The
headquarters of the company are located at Delft, Netherlands. The company operates
internationally with more than 100 stores all over the world and its business model presents a
huge opportunity for future growth of the company.
The vision statement of the company reads “To create better everyday life for the many
people” which highlights the focus of the company in improving the quality of life of its
customers by providing better quality home furnishing. Designing team of the best individuals
helps the company to constantly endeavour to diversify its product ranges which could help in
realisation of its vision (Kristoffersson, 2014). The mission statement of IKEA is considered to
be “offering a wide range of well designed, functional home furnishing products at prices so low
that as many people as possible will be able to afford them”. This statement highlights the
objective of serving the customers with best quality products at very competitive prices which
allows more and more people to afford the products which are being manufactured by the
company. Many strategies and tactics are being used by the management of IKEA with respect to
the mission and the vision of the company like reduction in prices, opening stores to serve more
and more people etcetera. Some of the key strategy of the company includes using a country
specific management style, concentration on individual marketing instead of mass marketing,
business diversity etcetera. Company has established a clear objective of providing the best
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quality goods to its customers at prices which makes them affordable for the masses which
implies that the target market of the company is not limited only to the people with high income
(Garvey, 2017). Managerial decision-making and strategy formulation in IKEA is influenced by
the factors in its business environment and the interests of the company’s stakeholders. The
impact of macro environment on the company can be better understood with the help of
following application of economic models:
PESTLE Analysis of IKEA:
PESTLE Analysis is a tool or a framework which is used by the managers of business
organisation to evaluate the impact of macro environment factors which are beyond the control
of company such as government policies or changes in technology on the operations and the
activities of the business organisation (Ho, 2014). It assists in policy formulation and early
identification of threat or an opportunity. A PESTLE analysis of IKEA is as follows:
Political factors affecting IKEA:
Political stability or instability in a country or a business territory creates an impact on
the operations of the organisation and its revenues. The political influence and relationship
between government and the multinational companies is what determines the extent of liberty
and intervention for these organisations. For stable revenue and profits, IKEA depends on such
relationships. Liberalisation policies and opening avenues for multinational companies to trade in
countries like India and China has influenced the decision of the managers of IKEA to expand its
trade to Asian markets which presents a huge growth opportunity for the company (Ehsan Ullah,
Karlsson and Dada Olanrewaju, 2016).
Economic factors affecting IKEA:
Economic factors such as rise in level of national income and import-export charges
affect the business operations of any organisation. Rising level of national income and
consequently high disposable income of people is an opportunity for IKEA to create a larger
customer base and offer its products of high quality to more and more segments of customer and
increase the spectrum. Developing and emerging economies of countries is an additional
opportunity for the company to expand its operations.
Social factors affecting IKEA:
Social factors refer to the trends in consumption behaviour and changes in the preference
of customers as a matter of change in culture and values. People nowadays prefer a high standard
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of living and comfort which is an opportunity for IKEA to strategically plan and target this
segment of customer. However, ultra-mobility of youth has discouraged the younger generation
from incurring a lot of expenditure on home furnishing which might be a threat for IKEA and the
management of the company needs to form strategy for minimising the impact of such threats.
Technological factors affecting IKEA:
Technology has shaped almost every industry and how the operations under any business
firm takes place. Paper catalogues are no more the only way to showcase the products which are
being offered by a manufacturer. Disrupting technological innovations has influenced the
managers of IKEA to expand the operations of the company to online platform and a website has
been developed for the company which lets the customer know about various types and
categories of home furnishing products which are offered and also provide details about the store
nearest to the location of customer. Technological changes has certainly influenced the processes
of IKEA.
Legal factors affecting IKEA:
IKEA has store in more than 41 countries and each country has its own set of rules and
regulations which makes it difficult for the company to comply with legal regulations and
complexities (Harapiak, 2013). It is important for the managers of the company formulate
strategy and plans which helps the company to avoid any lawsuit and be aware of what is
allowed within the business territory in which it operates.
Environmental factors affecting IKEA:
Sustainability and environmental protection is not just another aspect of business
environment which is up to the discretion of the managers but in the past few years, this aspect
related to business organisations has come upfront and put the onus on companies like IKEA to
mitigate carbon footprints and greenhouse gases emissions. Following the need to improve
sustainability, IKEA has invested a huge amount in solar panels and renewable energy and is
also making investments to help the poor and under-developed countries in fighting with the
consequences of climate change.
It can be observed that the business environment of IKEA presents many opportunities
for the company and some legal aspects of its macro environment also pose a threat which
should be dealt with strategically by the management of the company.
Stakeholder’s Analysis of IKEA:
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Customers:
Customers are the most important stakeholder for any business organisation and the
success of any business is largely influenced by the protection of the interests of it customers
(Miski, 2014). IKEA has made sure through its vision and mission that the best quality goods are
being provided to the customers at very competitive prices which helps in protecting and
guarding the interests of the customers.
Employees:
IKEA have developed positive employer-employee relations with the help of
maximisation of aspects related to the job which increases the satisfaction for the employees and
it has also helped the company in protecting the interests of its workforce.
Suppliers & Distributors:
The management of the company focuses on maintaining good relations with the
suppliers and the distributors and protecting their interests as well by clearing the payment due to
suppliers on time and granting loans to the distributors (Laurin and Fantazy, 2017).
Shareholders:
Maximisation of the amount invested by the shareholders is the main objective of the
company and the management of IKEA is thriving to improve the revenue and profitability of
the business operations which can help in wealth and profit maximisation for the shareholders of
the company.
Government:
IKEA makes sure that all the operations and business activities of the company are being
conducted in accordance with the laws and rules established by the government. It is important
for the company to avoid violation of any rules and regulations for protecting the interests of the
Government. Moreover, clearing all the tax obligations and import-export duties is another major
task for safeguarding the government interest.
TASK 2
P2 Analyse the internal environment and the capabilities of a given organisation using
appropriate frameworks.
RBV Framework for IKEA:
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RBV can be defined as a Resource-Based-View approach which can help an organisation
in achieving competitive advantage in the industry. The RBV view is based on the argument that
any business organisation which has the desire to maintain or improve its competitive position in
the industry should evaluate and look within the organisation to identify sources of potential
competitive advantage instead of examining the business environment to find opportunities for
competitive advantages (Lin and Wu, 2014). As per the RBV view, it is easier for an
organisation like IKEA to take leverage of internal opportunities for improving the efficiency
and productivity of the organisation in place of making efforts to acquire new skills and product
development by considering business environment. Resources can be classified into two
categories which are tangible and intangible. IKEA has numerous tangible resources such as
premises, machinery, land, human resources, financial resources, materials, stocks, etcetera
which can be used by the company to gain competitive edge and improve its position in the
industry. Along with the tangible resources, a number of intangible resources such as image and
goodwill of the company are also valuable. IKEA is known for its best quality of products at
competitive prices which has fostered and developed a great reputation and goodwill for the
company. This can be used by the company to gain competitive edge (Höcker, Sturén and
Troedsson, 2018). RBV framework is based on two major presumptions which are that resources
of any organisation are heterogenous and are not mobile. Heterogenous Resources implies that
every organisation even in the same industry differs on the basis of its resources whether tangible
or tangible and the immobility of the resources implies that at least in the short-run and medium-
run the resources can’t move from one company to another. This forms the basis of the argument
that resources of a company can be used effectively to improve business performance. The
managers of IKEA with the help of implementation of this framework, can evaluate the
resources which can be used potentially by the company to gain a competitive edge in the
industry such as financial resources and funds held by the company can be used to increase
production and quality of the goods which helps in improving competitiveness.
VRIO Framework for IKEA:
VRIO framework is a tool which is used to analyse the capability of the resources held by
an organisation in deriving a sustained competitive advanatge for the company. The framework
consists examining the resources of a company on four dimensions which are Value, Rare,
Imitable & Organisation. For example, it involves asceratining whether the resources held by an
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organisation are valuable, rare, easy to imitate and does the organisation and the workforce have
the capability to maximise and capitalise on its resources which might help in gaining a sustained
competitive edge (Knott, 2015). The application of VRIO Framework for IKEA helps in
evaluation of the resources of the organisation and identifying the areas of improvement. At last
the framework summarises and draws a conclusion as to the capability of the resources of IKEA
to provide a competitive edge to the company.
Valuable:
As per the VRIO analysis, the financial resources of IKEA are highly valuable which
helps the company in investing into opportunities or avenues of international operations. Human
resources and employees of the company are another valuable resource who possess high level of
skills developed as a result of impeccable training modules. Patents of IKEA are also another
valuable resource of the company which helps in smoothly operations without much competitive
interference. However, cost structure and research and development of IKEA is not a valuable
resource for the company because the expenditure which is being made on research projects is
more than the benefits which are being derived as a result of innovation.
Rare:
Financial resources which are enjoyed by the management of IKEA are found to be rare
resource since the company has a huge pool of financial resources which provides it the leverage
to invest into any business opportunity. Employees at IKEA are highly-skilled and trained which
is another rare resource for the company. Patents of IKEA in terms of product innovation and
business development is also one of the most important rare resources of the company. Hence, a
large portion of resources which are held by the company are rare.
Imitable:
Funds and financial resources which are held by IKEA are costly and expensive for any
organisation to imitate. The financial resources which the company possess is a result of profits
and revenue for a long period of time which is difficult to manage for any other firm or new
entrant (Carlsson, 2019). Similarly, patents held by the company are also considered to be
resoruces which are very difficult or almost impossible to imitate. However, employees of the
company and human resources are imitable with some serious efforts because it is possible for
every company or organisation to train its employee and develop their skills.
Organisation:
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Financial resources of the company are organised in an effective and optimal manner
which allows the management of IKEA to utilise these resources in the best possible way to
achieve high levels of operational performance and productivity. The company has also
organised its employees and human resources in a way which helps in maximisation of
productivtiy and utilisation of other resources of the organisation. However, it has been
ascertained that the patents held by the company are not properly organised and there still exists
a scope to improve the maximisation of value creation with the help of patents and copyrights
held by the company.
On the basis of above VRIO analysis for IKEA, it can be considered that the financial
and other resources of the company can be used by the management in an effective manner to
enjoy a sustained competitive advantage in the long-term in its industrial environment.
TASK 3
P3 Applying Porter’s Five Forces model evaluate the competitive forces of a given market sector
for an organisation.
Porter’s Five Forces Model for IKEA:
Porter’s Five Force is a tool of competitive analysis which is used by business
organisation to evaluate the impact of five forces which determine the competitive position and
strength of any organisation (Dobbs, 2014). Here is an application of Porter’s Five Forces Model
for IKEA:
Bargaining Power of Suppliers:
Bargaining power of suppliers of IKEA is low due to availability of a large number of
them which helps IKEA to procure the best quality of materials at the lowest possible price. In
case of an increase in the price by one suppliers, it is very easy for IKEA to switch to other
supplier at very low or negligible cost which puts the company in a dominant position in the
relationship with the suppliers.
Bargaining Power of Buyers:
The bargaining power of customers is almost high in case of IKEA and the products
which the company is offering but the management of the company lays stress on attractive
pricing to attract and retain customers in the long-run. Technology and the increase in number of
alternatives has put the customers in a dominant position in every industry and managers try to
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adopt cost strategy and marketing as a tool to attract customers which is exactly the case with
IKEA when it comes to bargaining power of customers.
Threat of Substitution:
Threat of substitutes for the products made by IKEA is very low primarily because of the
image and goodwill which the company has built as a result of its endeavours for the past many
years. Wide range of home-furnishing products with best quality which are being manufactured
by IKEA are quite hard to substitute and hence, the company faces almost no threat for
substitution of its products.
Threat of New Entrants:
Threat of new firms and players entering into the home furnishing industry is low to
moderate for IKEA. IKEA is a brand with international operations and a huge amount of
financial and other resources which are difficult to imitate and as a result it is very difficult for
any new firm or company which enters the industry to give a stiff and intense competiton to
IKEA (Berman, 2015). However, there are many players in the industry but most of them are
operating or functioning at a small scale or local level which poses no serious threat to IKEA’s
revenues and profitability.
Competitive Rivalry:
Level of competition in the industry in which IKEA operates is very high and intense.
The company faces both direct competition from other furnishing brands such as Ashley
Furniture, Argos, Rooms to go etcetera and indirect competition from supermarket giants
offering furniture and other range of home care products such as Walmart, TESCO, Target
etcetera. Along with this, local competition and a number of small players in the industry also
increase the level and extent of the competition in the industry for IKEA (Perchinunno and
Schirone, 2012).
It can be concluded that in the competitive industrial environment, IKEA holds a strong
position mainly due to the low threat of substitution and a wide range of products which are
being offered by the company. However, there exists an immense competition in the industry and
high bargaining power of buyers which influences managers of IKEA to constantly develop and
formulate strategies for better organisational performance.
Ansoff’s Matrix for IKEA:
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Ansoff Matrix for IKEA is a tool which can be used by its management to formulate the
market and product strategy for the company. Ansoff Matrix is a tool which provides four
different options of strategy formulation for any organisation which are market penetration,
product development, market development and diversification (Thijsen, Tong and van Leer,
2014).
(Source: https://research-methodology.net/ikea-ansoff-matrix/)
On the basis of analysis of the competitive position of IKEA, the strategic direction for
business growth of the company can be related with diversification. Diversification involves
development of new products which are to be sold in new markets. The risk associated with
diversification is high but considerng the resources of the organisation it is bearable. The
managers of the company should try to innovate and develop a new range of products which
should be launched in a new market to increase the revenues and potential profitability of the
company. Diversification can be a potential strategic direction for business growth of IKEA
since the company has already been adopting policies for market development into more than 40
countries. Along with market development, diversification can be sought by the management of
IKEA for expanding the business operations and improving the growth of the firm.
TASK 4
P4 Applying a range of theories, concepts and models, interpret and devise strategic planning for
a given organisation.
Porter’s Generic Strategy for IKEA:
Every business organisation aims to improve its position in the industry by gaining a
competitive edge. Michael Porter identified three main strategies which can be used by
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companies to gain competitive edge in the industry which are cost leadership strategy,
differentiation strategy and focus strategy which is further divided into two parts – cost focus or
differentiation focus (Tanwar, 2013). The management of IKEA is suggested to use both cost-
leadership strategy and differentiation strategy for expanding the operations and the business
growth of the company.
Under cost-leadership strategy for IKEA, managers need to make sure that the company
is aligning its operations with the mission of the company to provide the best quality products at
such prices which makes them affordable for more and more people. Managers need to maintain
relationships with suppliers who can manufacture the products or components for the company at
the lowest possible cost and the best quality in the form of sub-assemblies which reduces the cost
for both the producer and the customer as the consumer can assemble the final product by
himself. It will allow the managers to offer competitive prices to the consumer and increase the
quality of the product to enjoy cost leadership in the industry.
The management of IKEA is also recommended to follow the approach of differentiation
strategy also to a moderate extent. It is important for the company to differentiate its products
and brand from the other companies in the market to gain competitive edge. Managers of the
company can improve the customer service and make arrangements for enhancing the shopping
experience of the customer for establishing a distinct brand identity. The products which are
offered by the company are also of best quality at moderate prices which helps in differentiation
of its products. The company has also started making use of latest technology such as AI to help
customers take decisions which is a definitely a step in the right direction.
CONCLUSION
From the above project report, it can be concluded that various factors such as rapid
technological developments and stakeholders of the company create an impact on the managerial
decision-making and strategy formulation. On the basis of RBV and VRIO framework for IKEA,
it can be inferred that resources of the company have the potential to offer a sustained
competitive edge to the organisation. IKEA holds a strong position in the industry and is capable
to fight the competition which exists in its industrial environment. At last it can be concluded
that managers of IKEA should follow diversification as an intensive strategy for gaining
competitive edge and cost leadership as a generic strategy for improving the operational and
financial performance of the company.
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