A PESTEL ANALYSIS of IKEA
IKEA operates its more than 375 stores in various parts of the globe. Its global presence means that the brand is subject to several forces. In this era of globalization, from political to economic, social and technological, there are several forces that affect the brands and their business. IKEA is also affected by these forces. The maker of home furnishing products is known for its low prices and great quality products. To sustain a strong brand means being able to respond to the changing market dynamics faster. Here is a PESTEL analysis that explains how these various factors in the market affect the brand. PESTEL is a strategic tool used to analyse the impact of these external forces on businesses and industries. These 6 factors hold a special significance because they can affect a brand’s profitability and its position in the market.
IKEA operates across more than 41 countries. The political forces are there in every nation and affect the businesses. From supply chain activities to sales, all of them are affected by the political forces. Political stability leads to economic stability and in turn it means better sales and profits. Apart from it, the government’s attitude towards the foreign brands and its policies too matter. How friendly the government’s policies are decides how favorable the environment of a certain nation is for business brands. Political instability on the other hand can disrupt the business environment.
It can also lead to supply chain disruption. In the past few years China and India have acted to lower the political barriers for the foreign brands which had led to increased presence of the international brands in these markets. IKEA is planning to dominate the emerging Asian markets. The Red Tape is always a major worry for the foreign brands operating in these markets. As these barriers reduce slowly, India and China get to become the battleground of big brands like IKEA. Moreover, IKEA’s supply chain activities can also be disrupted by political instability. A large part of IKEA’s supply chain is located in Europe and political disruption there can affect it deeply.
Economic forces play a very special role in the business environment. The condition of the world economy decides how much profits and revenue the businesses will earn. Several of the big brands were in pretty poor shape during the recession. It was mainly because recession had led to a decline in people’s purchasing power. People lost their jobs in very large numbers and were forced to cut down on living costs. IKEA has managed its products prices very well. So, that helps it manage some of the pressure that arises from economic fluctuations. Still, economic fluctuations can be detrimental to the health of the big brands. A stronger dollar makes US based brands lose their profits. Now that the economic scenario is better and the condition of employment has kept improving, the brands all over the world are enjoying better sales and higher profits. The economic condition of a market is also an important factor that affects the pricing in particular regions and areas.
Social and cultural factors too can have a deep impact on business and its profits. Before setting foot on any of the international markets, it is important to get the local nuances right. It is important to respect the social and cultural values of the local market. “Ikea has not always gotten these local nuances right. The company came under fire for Photoshopping women out of its catalogue in Saudi Arabia and for removing a lesbian couple from its magazine in Russia. “We have done mistakes,” acknowledges Kajsa Orvarson, communications officer at Ikea Communications, the home of the catalogue, “but we are becoming more and more aware of how to improve and to share our values. (IKEA, Fortune, 2015)” While printing catalogues for distribution globally, IKEA has to ensure that the wrong things do not show up in the right culture. Moreover, social trends and other factors can have a deep impact on sales. If particular styles are in trend then the company must focus on them.
Technology has become central to nearly everything in the 21st century. From marketing to finance and customer service everywhere businesses are using information technology to provide better service to their customers. Brands like IKEA are focusing on providing a kind of experience from their digital channels that feels like real life shopping experience. IKEA is also using augmented reality to improve the level of customer service it provides. Now, consumer expectations are heightened and most focus has to be on better customer service. It is because research has also proved that better customer service also leads to better customer service. Technologies like Artificial Intelligence and Cognitive Intelligence have enabled the retailers to understand consumer behavior better and to provide them a new level of experience.
Sustainability is now an important focus area for most business brands. It is not because it helps with reducing costs but for it helps with creating a better brand image. It does reduce the brand’s operational costs but also improves a company’s image and the overall experience. IKEA too has shown some serious focus on sustainability. It has also invested in climate and as per a report by the Guardian, it planned to invest a sum higher than $1 Billion in renewable energy and to help the poor nations cope with the threat of climate change. By 2020, it wants that all the energy used inside IKEA stores comes from the renewable sources of energy. To this end, it has already invested a large sum in wind and solar panels. Not just that, it also wants its cotton and wood to be sourced from sustainable resources.
Legal threats are always a major problem before the big businesses. It is because laws and regulations are tough and even a small hassle with the law can prove costly. Labor laws are an important concern but there are other laws too that require compliance and can raise operational costs. Product quality is also an important issue. IKEA has faced some cases of tipping over and death in the past caused by its furniture. Moreover, laws vary from market to market. In the Asian markets particularly, the legal web is quite complex. India is an important retail market. However, penetrating it has been tough for IKEA. The reason is that the government wants such foreign brands to follow the rules it has set. IKEA would need to produce at least 30% of its inventory in India. Again this brings IKEA face to face with the Red Tape. Many more foreign brands are badly caught in the trap of Red Tape in India.