IKEA's Business Environment & Expansion Strategy in Austria

This report provides a comprehensive analysis of IKEA's business environment and potential expansion strategies within the Austrian market. It begins with an overview of IKEA's global operations and its success factors, followed by a detailed PESTLE analysis, examining the political, economic, social, technological, legal, and environmental factors influencing IKEA's operations in Austria. The report further explores the impact of opportunities and threats present in the Austrian market and applies Michael Porter's Five Forces model to assess the competitive landscape. The analysis covers market rivalry, the threat of new entrants, the bargaining power of suppliers and buyers, and the threat of substitute products. The report concludes with recommendations for IKEA based on the findings, focusing on leveraging opportunities, mitigating threats, and maintaining a competitive advantage through cost leadership and innovation. The document is available on Desklib, a platform offering a wide range of study resources for students.

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Business Organisation
Report
4/18/2018
Student Name

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Contents
Introduction................................................................................................................................2
About Ikea..................................................................................................................................2
PESTLE Analysis.......................................................................................................................4
Impact of opportunities..............................................................................................................6
Impact of threats.........................................................................................................................7
Michael Porter’s Five Forces Model..........................................................................................7
Conclusions and Recommendation............................................................................................9
References:...............................................................................................................................11

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Introduction
IKEA was started in the year 1943 and is the largest furniture retailer. Ikea also makes its
presence in Austria and covers a large share in the market. It offers a large variety of the
designer home furnishing products at a very rational price so that as many as individuals can
able to afford them (Ikea, 2017). Ikea develops those methods of production from which
production can be increased along with increase in effectiveness and efficiency of the
business. It is trying to make and sell ready to assemble furniture, kitchen appliances and
home accessories which are innovative and cost-effective as well. The objective of the report
is to make the understanding of the business environment in Austrian market and
understanding the nature of the business organization. Nature of business organization can
competition can be judged by its type of industry and competitors (Edvardsson and Enquist,
2011). The business environment can be understood by the scanning of the environment to
know the opportunities and threats present in the market. For scanning of the business
environment, some analytical tools are used which include PESTLE Analysis, Swot Analysis,
Porter’s five forces model.
About Ikea
Ikea is Swedish founded Dutch-based multinational group. Ikea product is such which can
easily assemble at any place because of this, sales of the company is showing the increasing
trend. It was founded by Ingvar Kamprad and currently has over 375 stores across 48
countries. The headquarters of Ikea is located in Leiden, Netherlands. The parent company of
the Ikea is Stichting INGKA Foundation. IKEA is owned and operated by a difficult
arrangement of not-for-organisation and for-profit corporation. The structure of the company
is divided into two parts: operations and franchising. The company is dealing in the retailing

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business of furniture. Operations and management activities of many shops are designed,
manufacture and controlled by the INGKA holding, a private company for profit-making
Dutch company. Ikea has its presence in 36 countries and 235 stores are run by the INGKA.
INGKA holding is not an independent company but wholly owned by the Stichting Ingka
Foundation. Ikea sales have been increasing from 2011-2017 around 29% in Austria. The net
profit of the company is also showing the increasing trend and company is growing very fast
in the retail sector (ICAEW, 2018).
The pricing strategy adopted by the Ikea is to give the low-cost furniture to the consumer at
large. Ikea always maintains a good and healthy relationship with its distributors and
influence them to buy new technology so that economies of scale can be achieved and per
unit cost declines. Ikea is using the low-cost leadership by using the low-cost leadership
strategy. There is a better use of new technology and outsourcing of specialist manager by the
company as the company is having the low average cost of production in the end. The
company is having a competitive edge over the market because of its lower price strategy.
Entry for the smaller companies makes difficult because of the existence of the barriers. As
the company is actively present in the market and communicate its policies, CSR activities to
customers also help to maintain a large customer base to Ikea. Ikea has many competitors in
the market which are offering furniture in different styles and functionality. Competitors
include Conrin, Cartel & Barrel, Ethan Allen, and Wal-Mart (Invest in Austria, 2018)
(Marcilla, 2014).
Financial performance of the company found to be increasing day by day because of its
innovative technology and cost leadership strategy. The sales revenue in the year 2013 was
28.5 billion euros and in 2017 sales was marked at 36.3billion euros (Statista, 2018). So these
figures show an immense increase in the sales of the company. Ikea is also planning to
expand its business in other sector and countries also (Rothaermel, (2015).

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PESTLE Analysis
PESTLE Analysis is done to know the effect of business environment on the business and
industries. The opportunities and threats in external environment can come to know by this
analysis. This analysis is useful to know the political factors, economic factors, socio-cultural
factors, technological changes, legal factors or government policies and the environmental
factors affecting the business directly or indirectly. These external factors are important as
they can affect Ikea’s brand profitability and its position in the market.
Political Factors
Ikea has its operations in many countries and every nation has its own different political
scenario. From supply the goods to selling them, all are affected by the political forces. In
Austria, the political environment is found to be stable so business can expand easily. In
Austria, there is high personal security and a reliable legal system. Administration policies
and other policies are more liberal as compared to other countries. The infrastructure
developed in Austria by the government is excellent. Austria government also introduced the
group taxation scheme for the welfare of business and individuals (Cheshnotes., 2018).
Economic Factors
Economic factor plays a crucial role in the business environment. The condition of the
country decides whether the business will earn the profits or not. Austria has around 8.8
million people living there and the employment rate is around 77.3% there. The real GDP
growth rate in 2015 was1.0%, in 2016 it was 1.5% and in 2017 it was found to be 2.4%.
There is an increase in the GDP rate every year which implies that the production level and
consumption level in the country is increasing. There will be high productivity in the country
and low unit labor costs. Per unit cost of products are low because the operation of economies
of scale. Consumers are earning a high amount which increases their standard of living

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also.in Austria, there is a condition of inflation in the market and people are enjoying a high
quality of life. The interest rates are also found to be low in Austria so business can be
expanded and start easily (Export.gov, 2018).
Social Factors
Social and cultural factors talk about the society and the culture the society and people are
following. Social and cultural will also has the deep impact on the business and its profits.
While printing the magazines and catalogs for distribution, Ikea ensures that no wrong things
to be shown up in them as it have a wrong impact on the company in society. Austria’s social
trend and other factors have a great effect on the sales of business. As the people of Austria
have specific demand for the designer and perfection in their products so Ikea has to make
goods accordingly. Normally the furniture may last for long and are inherited by their
forefathers but this trend in Austria has been changing recently (UPI, 2018).
Technological Factors
Technology has become important in 21 century. From finance to marketing of the product,
every business needs up gradation in technology to survive in the dynamic environment.
Technological factors include the research and development activity, automation,
customization and rate of technological change. Brands like Ikea are trying to provide the
best experience to its customers through digitalization. Now customer expectations have also
heightened, they also want to be served best by the company (Jonsson and Foss, 2011).
Legal Factors
Legal factors include the threat that affects the workings of the business. Labor cost has a
great impact on the business operations but some other laws are also there that require
compliance and increase the cost to the company. These rules and laws can become costly to
the business. According to the law labor there is a rule that any worker works for more than

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40 hours a week then he is eligible for the bonus. In Austria also there are many restrictions
and barriers to legal laws. Sometimes Ikea is unable to control its standard and quality in the
jurisdiction in Austria (Lybeck and Henrekson, eds. 2014).
Environmental Factors
Since it was found that Ikea has been sensitive to the environment but maintaining
sustainability in business is also an important focus area. This increased the brand image and
overall experience of business along with that it also helps to control the cost of business. It
helps the company to reach its target on time and have a positive impact overall environment.
For achieving sustainability in its business, Ikea is planning that all the energy used in the
business should come from a renewable source of energy in its business operation. For this
Ikea has invested a huge amount in the wind and solar panels. Not just that, Ikea also wants
that its cotton and wood to come from the sustainable sources only (Truth Today, 2018).
Impact of opportunities
Ikea is exploring the local source raw material to have a low cost per unit and less
transportation cost and this can be done Austrian market. From the economic point of view,
the country population has been increasing so there is a wide scope for the Ikea to explore its
business there. In Austrian market, expansion can be done easily in emerging economies with
potential for low-cost manufacturing. Low-interest rates and increase in the demand of the
consumer encouraged the companies like Ikea to invest more in the market. Ikea also gets the
stability in the political environment and legal system as it has a reliable system and Austria
is considered to be the heart of Europe. From the technical point of view, there is an
introduction to the digitalization in the business of Ikea leads to the popularity of e-commerce
and pick and drop formats (Market Research report, 2018).

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From the societal point of view, the consumers are changing the habits the consumptions and
spending. Previously furniture is inherited by their forefathers but now consumers are
spending on the furniture items as well. Another opportunity for Ikea, we can take into
consideration is that now people are more conscious towards an increase in their standard of
living so maintaining well-furnished home is also a need for a consumer
Impact of threats
The biggest threat for Ikea to enter the Austrian market is that all the existing companies are
enjoying the benefit of economies of scale and have a lower price advantage. Ikea may face
the pressure of prices in the initial years of business. Ikea may face the entry barriers in the
Austria market in the form of copyright and franchising as the market already has the
dominating player. These dominating players will not allow entering the other party in the
market. Another challenge that Ikea will face in Austrian market is related to the legal issues.
In Austria, there is the burden of regulation in the form of registration, transportation, storage
and disposal regulation of products. The process for entering into the market will take a long
way than it would be in some other country (Moon, 2004).
Michael Porter’s Five Forces Model
The Michael Porter's five forces model determines the market competition and attractiveness
of the market. These fives forces helps to identify the business power are lying in which
hands: buyers or sellers. The five forces of Porter are discussed below:
The rivalry of the firm
The rivalry of the firm includes the presence of intense competition in the market, which is
determined by the number of existing competitors. Rivalry competition is found to be high in

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the market when there are few sellers selling the same type of product and service. In the
market for Ikea, there is a large number of competitors and market is having intense rivalry
among them. This rivalry encourages the business to have an investment in innovation in
products and services (Porter, 2012). The company has to face the price wars (reduction in
price due to competition in price) also. All these will increase the cost of the business and
lower the profits of the business.
Availability of the substitutes
Substitutes are the products and services which can be used for one another. Ikea has
substitutes present in the market that create a threat to the company. Consumer moves to
substitute only when they are getting the exactly same product and services at the same price
or lower than that. The power of substitution decreases the seller’s power and the
attractiveness of the market (Kumar, Dass, and Kumar, 2015).
Bargaining power of the buyers
Bargaining power of the buyer can be defined as the negotiating power of the buyer that how
a buyer can influence the price of a product or service in the market. The cost of switching
from one supplier to another for the buyer is too low. As the market of the retailer is of low
margin and high volume business, so if there is more influence of customer on the prices of
the product, the businesses will go into losses. Ikea has many loyal and customer in the
market and are not price sensitive, but rely on the quality provided by the company
(Magretta, 2011).
Bargaining power of the suppliers
Bargaining power of the supplier factor analyses how many suppliers of business has the
power to influence the decision of the business and its competitors. Suppliers influence the

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prices and control over the market of business. If the market has fewer suppliers then they
have a monopoly over the market. In Austria, large numbers of suppliers are present in the
market so they do not have to play in the monopoly market (Kim and Min, 2015).
Threats of Entrants
An entry of new firm also affects the power of the existing firm. Involvement of cost and
money is quite low for a competitor to enter the market. The new company will enter the
market only when they see profits in the industry and market. Similarly, Ikea has seen the
profitable opportunities in the market of Austria and want to convert them into high yields.
There exist some barriers in the entry of the firm like patents and copyrights. Ikea can easily
enter the market of Austria and can grab the market share. The greater the risk Ikea will face
in the competition, more the reward it will get from the market (Kogler, Batrancea, Nichita,
Pantya, Belianin and Kirchler, 2013).
Conclusions and Recommendation
From the above discussion, we can conclude that Ikea dealing in the retailing business of
furniture. The company is selling the assemble furniture, kitchen wares etc. the company
wants to expand its business to other areas as well. The company is expanding its business
operations in Austria market, which is a good place to explore its business in the retail sector.
Before entering the Austrian market, the company has performed various analyses and
environmental scanning to know more about the nature of the market. For scanning of the
environment, Ikea has done the PESTLE Analysis in which company comes to know about
how the political force, legal forces, economic forces, technological forces and social forces
are playing in the market. The market has a large number of buyers present which demands
innovativeness and uniqueness in their products, so their more scope of expanding the market
for the company. Company evaluates the possible opportunities and threats from the scanning

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of the environment. Ikea also evaluates the competitive advantage and market attractiveness
using Michael Porter’s five forces. By using this Forces Company comes to know that the
business can be enter into the market and can take advantage from the competition.
From all the discussion it is recommended that the Ikea can establish its business easily in the
Austrian market as it is suitable for doing business there in terms of political stability, profit
motives, and expansion of business activities.

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References:
Cheshnotes. (2018) IKEA PESTLE Analysis. [online]. Available at:
https://www.cheshnotes.com/ikea-pestel-analysis/ [Accessed on 15th April 2018]
Edvardsson, B. and Enquist, B. (2011) The service excellence and innovation model: lessons
from IKEA and other service frontiers. Total Quality Management & Business
Excellence, 22(5), pp.535-551.
Export.gov. (2018) International Trade Administration. [online]. Available at:
https://www.export.gov/article?id=Austria-Political-Environment [Accessed on 15th April
2018]
ICAEW. (2018) Doing business in Austria. [online]. Available at:
https://www.icaew.com/library/subject-gateways/doing-business-in/austria [Accessed on 15th
April 2018]
Ikea. (2017) Democratic Design. [online]. Available at: http://ikea.in/democratic-design
[Accessed on 15th April 2018]
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https://investinaustria.at/en/business-location-austria/facts-figures.php [Accessed on 15th
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Jonsson, A. and Foss, N.J. (2011) International expansion through flexible replication:
Learning from the internationalization experience of IKEA. Journal of International Business
Studies, 42(9), pp.1079-1102.

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Kim, S.K. and Min, S. (2015) Business model innovation performance: When does adding a
new business model benefit an incumbent?. Strategic Entrepreneurship Journal, 9(1), pp.34-
57.
Kogler, C., Batrancea, L., Nichita, A., Pantya, J., Belianin, A. and Kirchler, E. (2013) Trust
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Magretta, J. (2011) Understanding Michael Porter: The essential guide to competition and
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Porter, M.E. (2012) The economic performance of regions. In Regional Competitiveness (pp.
137-166). Abingdon-on-Thames: Routledge.
Rothaermel, F.T. (2015) Strategic management. Maidenhead: McGraw-Hill Education.
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[Accessed on 18th April 2018]