Pestle Analysis of Ikea

PESTLE analysis of IKEA “To create a better everyday life for the many people."[1]

IKEA is a privately held, international home products company that designs and sells ready-to-assemble furniture, appliances and home accessories. The company is now the world's largest furniture retailer. IKEA offers a wide range of furnishings at low prices that many people will be able to afford. This is the idea at the heart of everything IKEA does, from product development and purchases to how they sell the products in IKEA stores globally. In today’s market we can buy locally or globally, high or low quality at varying prices. But to make good products at low prices, you need to develop methods that are both cost-effective and innovative. This has been IKEA's focus since its beginnings in Småland, Sweden. Maximising the use of raw materials and production adaptation to meet people's needs and preferences has meant that IKEA can keep their costs low. They claim that “the IKEA way of doing things is to pass these cost savings on to the customers”. [1] For a business such as IKEA to survive in today’s extremely competitive environment they must carry out strategic planning and management techniques that clearly define objectives and analyse the external and internal environment in order to formulate a strategy, implement it and make any changes to make sure that it stays on track.

PESTLE is a management technique that enables an analysis of six external factors that may impact the performance of the organisation. These factors are: Political, Economic, Social, and Technological, Legal and Environmental issues that could affect the strategic development of a business.

Political factors: This involves the regulation of policies in the workplace, there have been certain legislations made by the government on foreign investors (which IKEA is). For example the minimum wage policy legislation which means that the workers are not paid anything less than the stipulated wage to avoid cheap labor which therefore increases the production cost of the product thus increasing the final price of the product. Also the U.K has always been politically stable and the political parties have always welcomed the foreign owned companies allowing IKEA to transition from Europe to the UK easily. Also the taxation policies are not tough on the companies to enter the market which encourages companies to expand into the British market. Currently there are new business policies such as simplifying Health and safety regulations for companies which will make an impact on IKEA and how they train their staff on health and safety. Economical factor: IKEA has made their products in such a way that their price is very reasonable for the public especially during the economic recession that we have recently gone through. This has been of an advantage especially since IKEA products are mainly made in China reducing the cost of materials and labor.[2]

As the country's inflation rate is lowering and the national income is getting higher, IKEA have better chances to grow and capture the market. The rate of interest is low and so it encourages people to buy their product. Also the currency was strong till now but due to the recession scenario the business is going to face the impact. Perhaps as unemployment increases in the UK people are not going to be able to afford luxuries or unnecessary spending. In the fiscal year 2010, IKEA's sales grew by 7.7% to €23.1 billion and net profit increased by 6.1% to €2.7 billion. Conforama, Habitat and other rivals did not come close. IKEA's strong brand and low prices helped it to weather the downturn, even though 80% of its sales are in crisis-hit Europe. In 2010 its sales rose by 8.2% in Spain and 11.3% in Italy. The firm is doing well in Bulgaria and Romania and planning to expand further in central and Eastern Europe. [4]

Social factor: Throughout the years IKEA has always maintained a fair social standing. IKEA has completely understood the life style of the people in the UK and have developed their stores accordingly. As people have the flexible working hours and they tend to do shopping on odd hours or late hours (after 5pm) looking to this normally all IKEA stores are opened till midnight. Also stores have other facilities like children playing area and restaurants which is helping the parents who are accompanied with their children which is mainly the case on the weekends. For the future IKEA will have to keep their eye on the customer’s attitude to furniture, they may begin to desire designer high quality furniture to IKEAs low budget furniture.

To grasp an economical advantage to the organization, the company needs to recruit the correct staff and train them correctly. Customers make judgments and deliver perceptions of the service based on the employees they interact with. Staff should have the right skills, approach, and service knowledge to deliver the service that customers are paying for.

Technological factor: Technology has made it easier for IKEA to promote their product through the internet. It gives the customer detailed information about the product, the dimensions which make it easier for the customer to know what they are buying.

Apart from the catalogue services, this has been an integral part of IKEAs sales pitch for years. IKEA's strength is online service it provides the online help to the customers to devise their homes. The latest advancement in the stores is computer operated lifts to aid in moving large bulky furniture. Earlier after placing the order customer has to go to the warehouse for the pickup of the product but now IKEA has centralized store and warehouse. The customer has to place order and then has to put the code of product on the computed lifts provided and thus can receive the product. This saves the time of the customer and also the staff. Nowadays, most of people are computer literate; IKEA could save their cost by

printing the catalogue which in large volume annually. The customers could first research on which item they want to consume and to know further information about the price, function and so on. Then, IKEA’s website features hundreds of products as a way of demonstrating the width and depth of our product range so it is user friendly. However, IKEA do encourages its customer to visit their stores for full selection of products and also detail information.

Environmental factor: IKEA presents itself as a green company with a social mission. Mr Ohlsson (the chief executive since 2009) boasts of its charitable work and its aim to use only renewable energy. It uses recyclable products which in this case it reduces waste and space consumption, the packaging is less fancy and more environment friendly. The U.K is an environmentally friendly country and encourages the companies following the policies to protect the environment. IKEA’s mission is to provide products at low price but not at any price to the environment. It does the foresting for the woods used in the furniture and with WWF partnership it is working on projects to focus on sustainable forestry, cotton manufacture and climate change. IKEA also does third party auditing on the material used by its suppliers to check the compliance of raw material used. The company follows low emission foot print during the logistics as its materials are transported by rail, road or ship. Most of the products are eco-friendly and are healthy for the customers. It utilizes the maximum of the resources and therefore tries to use recyclable products to have less impact on environment. It also does charity projects with UNICEF for the educating children. In partnership with WWF it is also focusing on the countries like U.K, USA and China on the climatic change and low emission of fuel energy and encourages its staff by using public transport.

In 2003, there has been improved stress on several companies and managers to recognise their duty to society, and act in a way which assistances society largely (Lindgreen and Hingley, 2003). The foremost social matter frightening furniture retailers has been environmental issues, an important zone for companies to performance in a generally liable way.

Legal factor: Countries have legal laws for foreign investors to invest in their territory and these laws have to be abided by to invest, this makes it a bit difficult for IKEA to penetrate into some countries despite the fact that there is good market. U.K has legal policies for the organizations and thus IKEA follow the same for its staff and suppliers and some extend to its customers too. The policies which are followed by IKEA are like minimum wages, no forced or bonded labor, discrimination acts, safety regulations, health and accidental insurances, freedom of associations, etc. IKEA prevent child labor and works actively to prevent it. The Companies Act 2006 is undoubtedly the most important legislation in regards to the fundamental framework of a business such as IKEA. It identifies how a business's accounts should be presented, what the companies requirements are. Failure to comply with this piece of jurisdiction can have dire consequences for IKEA.

Forecasting the possible problems IKEA could face in future: It will be more difficult to respond to national needs and cultural sensitivity issues. Franchisees may demand more control over operations. With all these challenges emerging, it will be very difficult to maintain a global organizational structure. The best approach to meet these challenges is to find the proper balance between country level autonomy and centralized intervention. From the very beginning IKEA’s target market has been the middle class to lower middle class people. This strategy has been worked for a long time but IKEA never wondered about how much further they can reach. In USA the trend was changing; people wanted more elegant design. IKEA can develop products that are designed for the high class people who are sensible about the design and quality and do not care about the price. IKEA is enjoying competitive advantages but they’re also facing a lot of problems from the aspect of organization development that requires change to be taken. For example, size and scale, challenging time during economic downturn, demand for low price products, existing competitors in the same industry, consumer purchasing power and also cost reduction. All of these problems are very common in the business world whereby the organization have to aware all of the aspects to achieve organization objectives.