IKEA's Expansion into Mexico: A Comprehensive Analysis of the Business Environment

This report examines the feasibility of IKEA's expansion into the Mexican market. It analyzes the country's political, economic, social, technological, environmental, and legal factors (PESTEL) and applies Porter's Five Forces framework to assess the competitive landscape. The report also explores the impact of NAFTA and foreign direct investment on IKEA's potential success. Key considerations, including regulatory hurdles, financial assistance, investor protection, and research and development investment, are discussed. The report concludes with a comprehensive evaluation of the opportunities and challenges IKEA faces in Mexico.

BUSINESS ORG. IN A GLOBAL CONTEXT
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Table of Contents
Introduction......................................................................................................................................3
Introduction and Background of the organisation...........................................................................4
Current Market Strategies................................................................................................................6
Business Structure...........................................................................................................................6
Segmentation, Targeting and Positioning........................................................................................6
ANSOFF Growth Matrix.................................................................................................................7
SWOT Analysis...............................................................................................................................7
PESTEL Analysis............................................................................................................................7
Porter’s Five Analysis....................................................................................................................10
Marketing Mix...............................................................................................................................12
Analysis of the Business Environment in Mexico.........................................................................13
Trade and North American Free Trade Agreement.......................................................................14
Foreign Direct Investment in Mexico............................................................................................15
Factors affecting considerations of the business environment......................................................16
Issues affecting considerations of the business environment........................................................18
Conclusion.....................................................................................................................................20
References......................................................................................................................................21
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Introduction
The report has discussed in detail the business environment of Mexico. The report has
undertaken IKEA as the business organisation and Mexico as the business environment. The
report has been based on the scenario that IKEA is aiming to expand its business in the business
environment of Mexico. The report has professed on various aspects of business environment
and industrial climate of Mexico. The report has considered various aspects of the Mexican
business environment. These aspects include the business climate and the industrial framework,
the concept and scope of foreign direct investment in the city, the factors will enhance the appeal
of business environment etc. The report has also conversed on the issues that emerge in the
course of expansion of the business operation in Mexico. The report has performed Porter’s Five
Factor Analysis and PESTEL Analysis to perform a general analysis and identify the business
environment of Mexico.
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Introduction and Background of the organisation
IKEA was founded by Ingvar Kamprad in 1943. The organisation originally started as a small
scale business with mail orders and business selling gift cards, pencils etc. The organisation is
now world’s largest organisation functioning as designer and seller of ready to assemble
furniture, kitchen and home furniture appliances and decorative accessories. The organisation
provides with annual sales of $40 billion as per the records of 2016. The company is popular for
its affordable home décor furniture and eco-friendly business processes. The organisation is
highly regarded in its industry for paying attention towards cost cutting and environmental
sustainability within its business operations. The organisation functions in relations to producing
furniture applying the natural resources (Kesseli, 2017). The organisation has focused on supply
chain management and thus has been able to reduce the costing and expenditures to an estimate
of three percent each year. Several of the aspects such as strategic packaging, economies of
scales, transportation and modifications in the business processes have to lead the organisation to
develop and evolve as a competitive and growing business organisation. The organisation has
provided the expansion and business diversification programs through franchising in various
parts of the globe.
At IKEA the vision is to provide with developed everyday services to the consumers. The
business idea of IKEA supports the vision by offering well-designed kitchen and home furniture
and appliances. The strategy at IKEA is to provide low cost and affordable products to the
consumers so that each and every one is able to afford the products. IKEA witnessed a rise in
total revenues by 8.9% to £1.7 billion for the year 2017 (Pwc Mexico, 2015). The organisation
observed a growth in the market share of the United Kingdoms from 0.5% to 8.9%. The
organisation aims at reaching £2.4 billion of sales by the year 2020. The strategic aim of the
organisation in the United Kingdom is to achieve 13% of the United Kingdom’s home furnishing
market share.
The organisation condemns it has added up to 1700 jobs in the year which makes up a total of
10000 of the United Kingdom’s employees for the organisation. It is observed that the
organisation has spent £11.5 million on paying the employees for national living wages. The
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online business division of the organisation has specifically performed tremendously. It has
depicted a growth of 31% since the year 2015.
(Source: Molly Fallon, 2015)
According to a recent survey by Business wire in 2016, the global home furnishing market is
forecasted to grow at a Compound Annual Growth Rate of 5.36% during the financial years of
2016 to 2020. The major contributors towards this growth trend will be IKEA, Bed Bath and
Beyond, Macy’s alone in the United Kingdom.
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Current Market Strategies
Business Structure
The internal business environment of IKEA includes its internal factors that influence the
business and its operations. The internal factors of IKEA are its human resources which include
the employers and the employees, the financial resources, the raw materials and other productive
resources, the business processes and functions, business suppliers and consumers etc.
Segmentation, Targeting and Positioning
The segmentation for IKEA includes the demographic and psychographic segmentation. The
demographic segmentation entails the consumer tastes and preferences as more than 56% of the
consumer base of IKEA is younger than the age of 40 (Grant, 2016). The psychographic
segmentation includes the younger millennial having liberal cultural views and demands form
the organisation.
The targeting market of IKEA is the urban areas of the parts of globe served. The organisation is
more focused towards the young and urban areas of the consumer share. The organisation
focuses on the notation that more than 54% of the population lives in the urban areas that
comprise of more than 72% of the market share for the organisation. Focusing on the urban
market areas the organisation will be able to increase its sales, growth and consumers
preferences in Mexico.
The positioning is positioned as the world leader in home furnishing and kitchen appliances retail
chain. The organisation is positioned as a premium section of the industry that provides with
affordable and attractive designed products and furniture to the consumers (Management study
guide, 2017). Being the chain leader IKEA enjoys a competitive advantage in the industry. The
organisation is positioned as a cost leadership organisation.
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ANSOFF Growth Matrix
The ANSOFF Growth Matrix of IKEA can be determined by the organisation venturing into
business product lines and services. The organisation can expand into the services of providing
eatery and recreation components at the stores (Twarowska and Kąkol, 2013). For example, the
organisation can provide with cafes and small shop providing with eatables and food products for
the consumers to enhance their shopping experience.
SWOT Analysis
Strengths: Market leader in the home, kitchen furniture and appliances. The empirical growth
rate for the past six years and multiplied increase in sales by the online business division.
Weakness: Difficulty in controlling the standards and quality of various products and services
provided by the organisation in various parts of the globe. This is due to the organisation
functioning in various parts of the globe.
Opportunities: The green business model of the organisation provides with increased
opportunities to attract increased consumers towards the business (Baroto, et. al., 2012.). The
model focuses on the social and environmental responsibility of the organisation and thus will
attract the ethical market share in the global market.
Threats
The organisation possesses major threat from the local carpenters and local furniture business
organisation, as these competitors provide with durable services at cheaper costs than the
organisation. These competitors do not invest as much as IKEA and thus survive even at lower
rates of revenue and profit margins.
PESTEL Analysis
The PESTEL Analysis is an analytical approach which identifies the Political, Economic, Social,
Technological, Environmental and Legal impact on the business and the business environment of
the economy.
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Political
The political aspect includes the impact of political conditions and situations of Mexico on the
business environment and the economic conditions. The political aspect includes political
stability, political conditions and political influence of the country in the economy (Santander
Trade Portal, 2018). IKEA will be favoured by positive and stable political conditions and thus
will foster the expansion of business in Mexico.
Economic
Economic aspect in this analysis denotes the economic stability and the economic conditions
prevailing in Mexico. Mexico is a rapidly growing economy and a developing business
environment. The economic stability and development in Mexico will aid IKEA to expand its
business and provides with enhanced results.
Social
The social aspect of the analysis refers to the social composition and the demographics of the
consumers of the business in the market. The social aspect enables to understand and interpret
the demographics and characteristics of the consumers, their choices and their demands. Mexico
provides with diversified social components.
Technological
The technological aspect includes technological advancements and the availability of the
technological resources in the business environment. The technological aspect of Mexico is
strong and demonstrates a developing pace. IKEA will be provided with developed and enhanced
technological services and resources to foster its expansion in Mexico (Santander Trade Portal,
2018).
Environmental
The environmental aspect of this analysis indicates the various components of the environment.
Availability of resources, environmental responsibility, levels of populations, impacts of the
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growing business on the environment etc. are included in this aspect. There are various aspects
that have to be considered by IKEA in the environmental aspect of Mexico.
Legal
The legal aspect includes the regulations and legal constraints of Mexico. The government and
the law and order provides with various limits and restrictions to expand the business and
commence a new business in the geographical locations of Mexico. The law relating to business
entails various permission and abidance to various regulations (Pwc, 2018). Thus IKEA has to
abide by various legal regulations and restrictions to expand the business in Mexico.
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Porter’s Five Analysis
Porter’s five-factor analysis is an analytical approach designed to investigate and analyze the
level of competition and threat the competitors provide to a business organisation. The approach
identifies five basic forces as follows:
The threat of New Entrants
The force defines the threat new business entrants provide to the existing business in the
economy. The new entrants act as a threat to the existing business corporates and organisations.
In Mexico the foreign direct investment in high and thus there is a greater threat of new entrants
in the business environment to IKEA (Vahlne and Jonsson, 2017).
Threat of Substitutes
The threat of substitutes denotes the threat alternative business organisations or industries
provide to the existing organisation. Alternative industries and organisations develop innovative
strategies and techniques which provides with an increased threat of substitution to the business
organisations like IKEA.
Bargaining Power of Consumers
The bargaining power of the consumers also acts as a factor to enhance the business environment
of an organisation. Bargaining power of the consumers denotes the ability to negotiate the prices
and costs of the products and services (Schirone, 2012). The bargaining power of the consumers
in relation to Mexico is relatively low and thus provides with a lesser threat to the business
organisations.
Bargaining Power of Suppliers
Bargaining power of the suppliers refers to the ability of the suppliers in terms of financial
sources, raw material, human resources etc. The bargaining power of supplier directly influences
the costing and pricing of the various products and services. The availability suppliers in Mexico
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are high thus the threat is lower due to increased availability the bargaining power lowers and
competition increases internally for the suppliers.
Industry Rivalry
The industry rivalry also acts as an element to influence the business environment in an
economy. Industry rivalry identifies the levels of competition that prevails in the economy and
affects the business organisation (Schirone, 2012.). Industry rivalry in Mexico is extremely
strong and various business organisations go through severer competition. IKEA has a threat of
increased industry rivalry.
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Marketing Mix
The marketing mix of IKEA includes four Ps. These are Product, Price, Place and Promotion.
IKEA provides with a various range of designer and customised, ready to assemble home
furniture and kitchen appliances. Price includes the concept of the organisation providing these
products at low and affordable costs. The aim is to make this designer and standardised products
available to all the sections of the society. The place in marketing mix denotes the strategies
adopted by the organisation to attract increased consumer base. These include the supply chain
management, market coverage, distributors and franchising etc. (Schirone, 2012). Lastly, the
marketing mix of IKEA includes the promotion. The organisation is indulgenced aggressive
promotional strategies such as providing various discounts and vouchers on first time purchase,
additional discount and gifts on special occasions etc.
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Analysis of the Business Environment in Mexico
Mexico is a rapidly developing economy in the global economic environment. The city is
developing at a rate of 2.4% as per the records of 2016. The economic conditions of the country
do not account for a tagline of a developed economy since the gross domestic product of the
country is not high enough. According to the Gross Domestic Product Per Capita 2016, the GDP
rate is the US $10,307. The per capita income to be considered as a developed country is the US
$ 12,000. The business climate in Mexico is however favourable with small, medium and large
business organisations functioning in the business environment of the city. The business
communities entail various types and nature of industries engaged in manufacturing,
wholesaling, retailing of the products and services. The city provides with tremendous
opportunities to commence or expand the business through its availability of strong and skilled
workforce, huge areas and open spaces and an outstanding support services. The city
encompasses various types of business corporates that includes multinational and locally
recognised groups of business.
(Source: PWC Mexico, 2015)
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Trade and North American Free Trade Agreement
The North American Free Trade Agreement is a trade agreement between the Mexico, Canada
and the United States. The agreement denotes reduced tariffs on trade between the nations and
provides with lowered taxation and duties for the cross-nation trade. The aim of the trade
agreement is to foster the growth and development of the economic conditions and economic
stability in the three nations. These three nations act as the economic power for North America
thus focus is laid on their interdependent trade and business agreements (Martorell, et. al., 2013).
The trade agreement has lowered and established minimal tariffs, tax, and import and export
duties. According to a recent survey, it was analysed that one-fourth of the United States imports
for crude oil, gold, machinery, vehicles, fresh produce etc. originate from the Mexico and
Canada. It was also observed Mexico and Canada are the second and the third largest supplier of
the imported goods in North America. The NAFTA aims at fostering the expansion and growth
of this three economics.
IKEA will be benefitted by this trade agreement, as the agreement will provide with lowered
prices for the sources and the services that the organisation will require to produce its products
and goods. The tariffs will reduce the import costing for the organisation. The lower prices of
imports will directly lower the costing and operational expenditures for the organisation. This
agreement will enable to keep the interest rates low for IKEA and will enable to generate greater
revenues and profits. It is analysed that NAFTA boosted the economic growth of Mexico by
0.5%. The growth of economy increased the service imports for Mexico by the Canada and
United States (Fernández and Meza, 2015). With the application of NAFTA the United States
foreign direct investment in Mexico increased by three times. The increase in foreign direct
investment will enable IKEA to enter Mexico more effectively and easily.
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Foreign Direct Investment in Mexico
Foreign direct investment is the investment made in the form of acquiring business ownership in
a particular business sector in a country by any other business entity established in a different
country. Foreign direct investment in Mexico depicts a favourable attitude by the government
and the legal structure of the economy. The FDI is only restricted in certain significant activities
that are under the control and administration of the state or Mexican investors. With the
application of NAFTA, foreign direct investment in certain restricted areas will be gradually
allowed to some extent with the collaboration of the state authorities (Fernández and Meza,
2015). IKEA will also be supported by favourable economic and foreign direct investment
opportunities. The organisation will be supported by wide open trade markets and agreements
with eminent business organisations located in various parts of the globe. Mexico is a member of
Organisation for Economic Cooperation and Development (OECD), the World Trade
Organisation and the Asian-Pacific Economic Cooperation Mechanism (APEC). These features
of the foreign direct investment policies will enable IKEA to expand the business in Mexico
effectively.
(Source: Santander Trade Portal, 2018)
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Factors affecting considerations of the business environment
Mexico currently provides with a broad and a free trade agreement network includes variously
developed economies such as North America, the European Union, Japan and some specific
parts of South Africa. IKEA functions major of its business in these locations. The free and
broad trade agreements in these locations and developed economies will enable IKEA to support
an effective expansion. The organisation will also be able to develop increased business in its
already established business market due to these free trade agreements. The business
environment provides with privatization in all non-strategic government assets this feature of the
business climate will enable to develop the business in the most effective manner (Molly Fallon,
2015). This feature will enable to develop and establish business with minimal restrictions and
intervention of the government and regulatory authorities. Another factor that is to be considered
by IKEA is a froing direct investment. The government and the legal authorities allow for a free
and wide variety of foreign direct investment. This foreign direct investment allows undertaking
ownership of the business entirely by the business organisation without any collaboration with
the local Mexican investors and government authorities.
The industrial climate is dominated by private investment in manufacturing, construction and the
hospitality industries. IKEA deals in retail business and trade operations of furniture
manufacturing, home and kitchen appliances. This privatization in the manufacturing sector will
enable to expand the business with empirical policies and restricted government intervention
(Burt, et. al., 2015). The government provides with increased development programs and
initiatives to increase the establishment of manufacturing operations for increased export, labour
intensive industries and retailing business and trade.
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(Source: Molly Fallon, 2015)
The framework of the industries is designed to foster economic development plans. The scope of
privatization in various manufacturing and retailing industries will enable IKEA to expand in
various sectors and procure the required resources at lower costs. The organisation will definitely
prosper with expanding the business in the geographical boundaries of Mexico.
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Issues affecting considerations of the business environment
There are various challenges that operate in the business environment and the industrial climate
of Mexico. Even after repetitive government initiatives and economic development plans, these
challenges are hard to fight and demotivate the consideration of the business environment. The
issues are discussed as follows:
 Dealing with permits and regulations: The government is still very strict towards
providing permits and authorities to invest and expand the business in Mexico. For example, it
takes around 69 days and a follow up of 10 diverse procedures to seek the permit to establish and
construct a business under the OECD norms and regulation.
 Financial assistance and credits: There are ample financial institutions and
organisations that provide with financial stability to the business organisation. The nation still
has to go a long way to support the foreign direct investment and business organisation
originating from different parts of the globe (Chen, et. al., 2013.). The constant fluctuation in the
exchange rates disturbs the equilibrium of the supply and demand of the finance.
 Protecting investors: With the introduction of NAFTA the trade and the free flow of
operation has been increased in North America and Canada. This increased trade has specifically
impacted the trade and operations with the other parts of the globe. This has resulted in
decreased trade and interaction with certain parts of the developed economies.
 Less investment in research and development: The government invests less than 0.5%
of its Gross Development Product in the research and development activities. The medium and
large scale industries also deploy lesser amounts of investments which results in decreased
innovative and developmental activities in the industries and business process of the economy
(Harapiak, 2013).
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Analytical Approach
The analysis of the business environment in Mexico can be exercised by the application of two
analytical approaches. The approaches are Porter’s 5 forces and the PESTEL Analysis of the
business environment.
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Conclusion
The report has attempted to acknowledge and discuss the concepts of global business
organisations in the business environment. The report has undertaken Mexico as the business
environment and IKEA as the business organisation. The report has identified the analytical
approach of Porter’s Five Factor Analysis and the PESTEL analysis as important elements to
evaluate the business environment of the location. The report has discussed the factors such as
government initiatives, special economic plans and programs etc. as the factors influencing the
appeal of the business environment. The report has also converse on various issues and
consideration IKEA will undertake before expanding its business in Mexico.
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