Advertising Industry Analysis: PESTLE, Porter, IKEA Report

This report provides a comprehensive analysis of the advertising industry, examining its macro and micro environmental factors. It begins with an introduction to the industry and proceeds to conduct a PESTLE analysis, exploring the political, economic, social, technological, and legal factors impacting advertising. Following this, a Porter's Five Forces analysis assesses the competitive landscape, including the bargaining power of suppliers and buyers, the threat of new entrants and substitutes, and industry rivalry. The report then delves into IKEA's business strategy, illustrating how the company utilizes Porter's generic strategies—cost leadership, product differentiation, and customer focus—to achieve success. The report highlights IKEA's innovative approaches to furniture retail and its ability to offer high-quality products at competitive prices. Finally, the report concludes with an overview of IKEA's successful position within the industry.

Contents
Introduction...........................................................................................................................................2
PESTLE Analysis..................................................................................................................................2
Porter’s Five Force Analysis.................................................................................................................4
Bargaining Power of the Suppliers....................................................................................................4
Bargaining Power of the Buyers........................................................................................................4
Threat of New Entrants......................................................................................................................5
Threat of Substitutes..........................................................................................................................5
Rivalry...............................................................................................................................................6
IKEA’s business strategy for their products and services using Porter’s generic strategies...................7
IKEA’s Successfulness in the Industry..................................................................................................9
References...........................................................................................................................................10
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Introduction
Due to rise in competition in almost every industry, advertisement has become a mandatory
aspect of the business strategy of most of the firms. Advertisements can be used at several
stages like the introduction of a new product, promotion of an existing product, making the
users aware if the improved version of an existing product and also sometimes to improve the
overall brand image of the company. Advertisements provide customers a chance to carefully
choose from the large amount of options available to them on the basis of their requirements.
Advertisements can be done from business to customers as well as from business to business.
Print media like newspapers, magazines, newsletters, hoardings have been the traditional
modes of advertisements. Due to advancement in technology, advertisements have gained
popularity among social networking sites and digital media.
The purpose of this report is to analyze the advertising industry by studying the macro and
micro environmental factors. In order to do so, PESTLE Analysis and Porter’s Five Forces
Analysis of the advertising industry is conducted. In the other section, Porter’s Generic
Strategies have been explained along with their application in IKEA, one of the leading
furniture companies.
PESTLE Analysis
Political and legal factors affect the advertising industry by regulating the content of the
advertisement. In certain countries the advertisement and promotion of alcohol, cigarettes, etc
are considered illegal. Additionally, in some countries the places of and medium of
advertisement are also regulated by laws (Hopkins, 2015).
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Economic issues have a great impact on the advertising industry. For instance, in case of
recession, the companies tend to get rid of the advertisement campaign more than any other
aspect of their business. In financially tough times, advertising is the first one to leave the
business. This breaks the link between the brand and its targeted customers. Recession also
comes as a challenge for bigger advertisement agencies as the brands shift to smaller and
cheaper agencies in order to cut their budget on the advertisements. This forces big budget
commercial agencies to lower their prices significantly or they might just run out of business
(Stuvia International, 2017).
Social values have always been a key driving force in the advertisement industry. Currently
social networking has become a very integral part of the society. This has opened new
platforms for advertisement. A lot of big brands chose social networking sites like Facebook,
Instagram and Twitter to introduce and promote their products and services. All these
mediums of advertisements are more successful than print media and other traditional
advertisement modes because of a wide coverage of customers. Also, these platforms do not
require a lot of monetary investment. Another social factor that affects the advertisement
industry is the society’s obsession with celebrities. Companies tend to tie up with
advertisement agencies that have good celebrity connections, to endorse their brand.
Technological advancement has had the biggest impact on advertisement industry. Digital
advertising has gained huge popularity over years due to technological development. This
mode of advertisement helps the company to keep a track of what is being accepted by the
public and what is not. Also, due to easy accessibility of internet on mobile, every brand is
developing their personalized brand applications where users can go through various product
lines offered by the company, buy them and also review them on the basis of their
experience. This has helped the businesses to build a direct contact with their customers
(Hayes, 2012).
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Environmental aspect does not influence the advertising industry in any major way. The
environmental aspect expects the industry to make the customers aware about the
environmental implication of their advertised products. Also, the advertising agencies are
expected to use environmental friendly methods to advertise.
Porter’s Five Force Analysis
Bargaining Power of the Suppliers
Every business requires raw material, labor and other services to run its operations. These
resources are supplied to the business by a third party. This party becomes the supplier of
inputs for the company. The suppliers can make or break the business with the price and
quality of the products offered by them. This power of suppliers over the business is known
as the bargaining power of the suppliers. The supplier would always want to sell its products
at the highest possible prices. If the number of sellers is limited, the bargaining power of the
suppliers tends to be high and vice versa. In advertisement industry, there are a number of
companies offering inputs like animation personnel, models, costumes, hoardings and other
inputs, that the industry has a low degree of bargaining power of suppliers.
Bargaining Power of the Buyers
The bargaining power of the buyers can be explained as the power that customers have to
make the business more or less profitable. The profitability of the business is directly related
to its customer, but having a few customers gives rise to the bargaining power of the buyers.
For instance, if a business has a small number of buyers who tend to contribute to large
portion the business’s profitability, then these buyers can force the business to sell its
products and services to the buyers at a lower price. Companies with fewer customers have
high bargaining power of buyers. In advertising industry, there are a number of small
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advertising agencies that allow buyers to have a various options with them, giving them high
bargaining power. Similarly, the big advertising agencies that have a few large scale
companies as buyers are forced to lower their prices because of their competition and hence
the bargaining power of buyers remain high in this scenario too (Apoorva & Arpankumar,
2014).
Threat of New Entrants
Every business has a number of new companies entering the industry. These new entrants
enter the industry with a purpose of gaining market share. If the entry into an industry is easy,
the high number of companies tends to put pressure on the existing companies which in
return have to lower the price of their offerings. In order to discourage new firms to enter the
industry, several legal and financial barriers can be introduced. Also, the attitude of the
existing companies towards the new entrants can affect the number of new entries in the
industry. Advertisement industry consists of some big advertising agencies that are the key
players of the industry (Altman, 2017). These agencies tend to have a hostile attitude towards
the new companies which discourages any new company to enter into the advertising
industry. On the hand the factors that encourage new entries are the absence of any legal
regulations and low capital investment requirement to set up a new advertising agency.
Threat of Substitutes
Products produced by one business can be easily replaced by the products of another business
producing similar products. If the product is not differentiated, there are higher chances of
substitution. Alternative products tend to have features that can fulfil the requirement of the
buyer to a great extent. These products can steal away the share of profit of the business if
they act as a replacement for the original products. In case of advertising industry there is a
great threat of substitution because of the large number of firms in the industry. These firms
tend to have different prices and can be easily switched to, by the buyers. Also, in order to
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save cost the firms also indulge in direct marketing and can completely eliminate the role of
the advertising agency. The threat of substitutes remains high in the advertising agency.
Rivalry
Competition helps the companies in any industry to give their best in order to stay ahead of
their competition. Industries with high number of independent businesses constantly thrive to
provide better products and services to its customers. The advertising industry witnesses a
great degree of rivalry since a number of low, medium and large scale advertising agencies
are present. Also, these agencies tend to offer a number of different options to their buyers
making it difficult for their competitors to survive. This competition forces the companies in
the advertising industry to constantly improve the variety and quality of their offerings to the
buyers.
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IKEA’s business strategy for their products and services using Porter’s generic
strategies
IKEA was founded in Sweden in 1943. The company has ever since grown to the world’s
biggest and most successful furniture retailers that sells self-assemble furniture, daily
necessities and home decor accessories. Michael Porter in 1980 defined three generic
strategies, namely Cost Leadership, Product Differentiation and Focus on Customers. These
strategies were believed to help any company gain competitive advantage over other
companies in the industry (Jung, 2014).
Cost Leadership refers to offering products and services at a lower price than the
competitors. This strategy focused on increasing the sales of volume whilst keeping the price
cheaper. The higher volumes would help the business to compensate for the profit lost
because of low prices. This strategy also helps the business to increase its market share. This
strategy discourages new firms to enter the industry, hence reducing competition and the
threat of substitutes (Liu, 2016). IKEA has incorporated this strategy in its business to a great
extent. The Swedish furniture retailer offers furniture to the buyers at a very cheap price.
IKEA has been recognized as one of the most innovative companies in the industry. The
company is able to offer products at a lower price because the company sources its products
from low-wage countries. It saves a lot of money from labor cost. The company also does not
assemble the furniture and save money on that front too. These approaches significantly
lower the cost of production for the company.
Differentiation strategy revolves around the idea of making the products and services offered
by the business diverse in nature. This strategy is applied differently in different industries,
depending upon the nature of the business. Differentiation can be introduced in the form of
diversity in the product’s characteristics, support, service quality, functionality and also the
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lifecycle. In order to use the differentiation strategy effectively a lot of research has to be
conducted (Aresu, 2013). The organization needs to be innovative and capable of introducing
and managing change. Additionally, the marketing department needs to be strong in
promoting the differentiated product to make the buyers understand the key changes made to
the existing product and how they can benefit from that change. IKEA has introduced
Differentiation Strategy in the way people buy furniture. The purchasing process of furniture
was made very innovative by IKEA. The company has designed its stores in the form of a
unique building with noted brand symbol and style. The company places its products in
prototype rooms will are very stylish. This gives customers insight into how good or bad a
piece of furniture would look in a proper room set up. The stores of IKEA have a homelike
environment which encourages the whole family to shop together, making it a picnic like
experience (Gondal, 2016). This is something that the furniture stores owned by IKEA’s
competitors do not possess. Also, providing high-quality, fashionable furniture at lower
prices also differentiates the company from others in the industry.
The customer focus strategy aims are identifying the right segment of customers that have to
be targeted by the business. After the identification of this segment, the business develops
low-cost focused or product differentiation focused strategy based on the nature of the niche
market. This customer focused strategy enables the business to make its customers happy and
encourage brand loyalty. IKEA uses a hybrid strategy to focus on its customers. This strategy
is a mixture of low cost products and product differentiation (Suarez, 2006).
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IKEA’s Successfulness in the Industry
IKEA’s adoption of Porter’s generic strategy has helped the company to become the top
furniture seller around the globe. The company has over 300 stores in 27 countries and
manages to generate revenue of around $37 billion in one year. The success of the company
can be highly credited to Porter’s generic strategy of cost leadership. People initially used to
think of buying furniture as a huge investment that could disturb their financial stability.
IKEA offered modern furniture to the people at an unbelievably low price which encouraged
people to buy new furniture. This helped the company to increase the volume of its sales
which eventually resulted in huge profits. The company became customers’ favourite
furniture retailer which further promoted brand loyalty (Gondal, 2016).
IKEA has not just achieved price and product differentiation, but has also changed the way
people shopped. The company has a perfect destination showroom with comfortable sitting,
amazing ambience and facilities like cafeteria. This has converted the traditional shopping
experience to a family’s day out like a picnic. People do not just visit because they need
furniture they also do so to get their children’s opinions on their choices since children are
reluctant to accompany parents on a regular furniture shopping day. IKEA’s overall
prospective customer base has inclined due to the way it has designed and placed its stores.
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References
Altman, R. (2017). Trends in the Advertising Industry. Retrieved from
http://smallbusiness.chron.com/trends-advertising-industry-61610.html
Apoorva, P., & Arpankumar, P. (2014). In depth study on advertising industry. V. M. Patel
Institute of Management. Retrieved from
http://gnu.inflibnet.ac.in/bitstream/123456789/2618/1/Advertising%20Industry.pdf
Aresu, C. (2013). IKEA: more than low prices. Retrieved from
http://thebusinesstrategy.blogspot.in/2013/03/ikea-more-than-low-prices.html
Gondal, S. (2016). Identify how IKEA has achieved differentiation from its competitors?
ANSWER Differentiation Strategy. Retrieved from
https://www.academia.edu/8001455/Identify_how_IKEA_has_achieved_differentiatio
n_from_its_competitors_ANSWER_Differentiation_Strategy
Hayes, N. (2012, June 01). PESTEL on Advertising. Retrieved from http://nicola-
hayes.blogspot.in/2012/06/pestel-on-advertising.html
Hopkins, A. (2015, January 21). PESTEL On Advertising. Retrieved from http://alice-
hopkins.weebly.com/pestel-on-advertising
Jung, S. (2014). The Analysis of Strategic Management of Samsung Electronics Company
through the Generic Value Chain Model. International Journal of Software
Engineering and Its Applications, 8(12), 133-142. Retrieved from
http://www.sersc.org/journals/IJSEIA/vol8_no12_2014/12.pdf
Liu, J. (2016, October 02). IKEA–A success of Porter’s Generic Strategies Combination.
Retrieved from https://blogs.ubc.ca/junlingliu/2016/10/02/ikea-a-success-of-porters-
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generic-strategies-combination/
Stuvia International. (2017). PESTLE for Advertising Industry. pp. 1-2. Retrieved from
https://www.stuvia.com/doc/262123/pestle-for-advertising-industry
Suarez, F. (2006). International business strategy: IKEA. Retrieved from
http://www.actuarisk.be/files/IkeaSite.pdf
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