Business organization and Environments in global context PDF

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Business organization and Environments in global context 1|Page Table of Contents Introduction ................................................................................................................................3 Background Information about IKEA ............................................

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Business organization and Environments in global context

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Table of Contents Introduction ................................................................................................................................3 Background Information about IKEA ..........................................................................................3 Business environment in Germany ..............................................................................................4 PESTEL analysis: Germany ........................................................................................................5 Political factors .......................................................................................................................5 Economic factors:....................................................................................................................5 Social factors...........................................................................................................................6 Technological factors: .............................................................................................................7 Environmental factors: ............................................................................................................7 Legal Factors:..........................................................................................................................8 Porters Five forces: IKEA ...........................................................................................................8 Bargaining power of suppliers: ................................................................................................8 Bargaining power of buyers:....................................................................................................8 Threat from substitute products: ..............................................................................................9 Threat from New entrants: .......................................................................................................9 Level of competitive rivalry: ...................................................................................................9 Recommendation: .......................................................................................................................1 Conclusion: .................................................................................................................................1 References: .................................................................................................................................2

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Introduction With a view to creating positive changes in people`s lives, IKEA, a popular multinational company has been spreading their business of well designed, functional homewares at lower prices around the world in 411 different locations. The company was founded initially in Sweden about 75 long years ago. A 17-year-old carpenter named Ingvar Kamprad started selling domestic furniture in pieces so that they could be delivered or transferred easily. In the beginning years of IKEA, it was mostly a mail-order sell business. The company has earned gross profit over 12,565 million euros in the latest financial year, 2017. The company has a brand value of 17,481 us dollar. The company is known to be the largest retailer of furniture with exquisite and modern design. The designs are also coordinated with ecofriendly simplicity. The firm is also very popular in terms of its corporate governance, attention to details and cost control. Currently, the company runs its business in 49 countries. The company aims to extend its business in Germany, a western European country with second largest population in the continent. The company has the freedom and financial strength to invest in the country for long term.

Background Information about IKEA The company has about 780 million customers in 355 shops employing over 1,49,000 employees (IKEA, 2018). The immense growth and profitability of IKEA has allowed the company to develop in many ways. The company has been continuously focusing on creating good customer base and experiences. IKEA wants to make customer friendly shopping experiences. This will further deliver IKEA`s vision. The company operates one of the biggest shopping centers in world. The stores attract 460 million visits every year (Alan, 2018). The company has been investing in core expansions, renewable resources etc. being a self-financed company, IKEA keeps strong focus for long term investment. IKEA has unique financial approach. The growth target is aimed to deliver sustainability. In latest year, the company has taken some big strides in investment portfolio. It has opened an opportunity to use its cash reserve for expansion. The company`s has made distinctive achievements in latest years. For example: •

IKEA has made Eur 2.5 billion net profit in 2017

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IKEA has been able to produce Eur 1.8 billion total food turnover

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More than 30,000 new customers join every day in IKEA

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•

2.1 billion people has paid visits to IKEA.com

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IKEA has experienced 37 million visits to the catalogue and store apps

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IKEA has almost 9,500 products. Every year, the product portfolio is revised by almost 2,500 new products (IKEA, 2018).

•

IKEA has 49.2% female managers. The company has been an advocate for renewable and sustainable resources, women empowerment etc. for many years.

Despite earning a record revenue in 2017, the company could not enjoy a high after-tax profit due to its sharp increase in administrative expenses. The company has employed more co-workers. Besides, the company has invested Eur 3.1 billion in distribution, stores, customer network, forestry, and shopping centers. For 2017, retail sales growth was 3.8%. the net financial result is Eur 0.3 billion. Sales has grown 3.5% in eurozone. In 26 out of 29 markets, IKEA has experience growth in sales (IKEA, 2018). The company wants to reach more people through expansion. Customers around the world expects affordable furniture for their home. The services should be easily accessible. One of the key advantages of IKEA is its depth customer knowledge. Despite having a 41% decrease in net profit, the company has actually grown in terms of new outlets, more visitors and larger number of products.

Business environment in Germany Germany is in northern central Europe covering 356,750 km2.9 countries share Germany’s borders. it is considered to be located in one of the world’s most active zones for trade and business. It has easy access to United Kingdom and Nordic countries (Stickney, 2013). The capital, berlin is very influential in Europe`s politics and culture. Germany is one of the top 3 exporters in the world. Germany is a member of European union. So, the trade policies are affected by EU`s external trade policy. It has adopted euro since 2002. The country is expected to grow 1.7% in 2019 in the back of resilient domestic demand and export growth (Tradingeconomics com., 2018).

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PESTEL analysis: Germany Political factors As chancellor Angela Markel announced that she is going to step down in December 2021 as her current role of CDU party chief, this may create a power vacuum in Germany. In the third quarter of 2018, the country has experience shrank due to increase in political turmoil and quite depressing monthly data. The effects are one off and it happened for the first time since first quarter of 2015. The external sector has been weak along with trade related uncertainties. Private consumption has deceased despite increase in consumer confidence. The current political state of Germany is quite concerning due to some important reasons. The CDU party came to an agreement with Social democrats (SPD) called “Grand Coalition” to form a power sharing government. The agreement needs the approval of SPD`s 4,64,000 membership which is evidently strong. The postal vote has begun and the results will be published on March 4, 2019. Many influential members of SPD are against this coalition. Latest official poll vote shows very low SPD support. Since the election, Angela Merkel`s approval ratings have also decreased. There are uncertainties in SPD leadership as well. The potential future leader of Social democrats Nahles has assured his party that SPD will not be an easy power partner. The anti-immigrant alternative parties with strong anti-Islamic stance is becoming increasingly popular. IKEA has to consider the economic uncertainties of Germany in the coming years.

Economic factors: The largest economy of Europe, Germany is motivated highly by social economy (Czinkota, 2014). It has 4th largest nominal GDP in the world with strong household consumption. As much as 2/3rd of world`s largest trade fairs take place in Germany. German exporters have been able to spread their fine engineering techniques through siemens, gas turbines etc. The unemployment rate in Germany is 5.7% which is lowest in the last 5 years. The PPI inflation rate is 2.3% and CPI inflation rate is 1.7% (Cia.gov., 2018). The GDP per capita is Eur 3,267 bn. In the year 2017, manufacturing sector in Germany has employed 8 million workers and thus contributed Eur 700 billion in GDP (Heritage.org., 2018). Germany is the home of many popular brands and leading multinational companies. IKEA will face difficult competition in Germany despite having favorable macro variables.

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Figure: German GDP Growth rate trend (Source: Cia.gov., 2018)

Social factors: Germany is one of the top influential country in Europe region in terms of language, culture, education and other social factors etc. The country has inexpensive education access, where most state-owned universities are nearly free of charge. Education is subsidized by government. It has population more than 80 million. Business confidence in Germany has slipped slightly from 102.9 October, 2018. The trade conflict between USA, EU and China was dense during that period. BREXIT uncertainties also put some critical marks on Germany. However, it is expected to ease in late 2018. Private consumption in Germany is expected to grow by 1.6%. IKEA has to consider social factors and concentrations in Germany for successful expansion (Cia.gov., 2018).

Figure 1: Business confidence: Germany (Source: Tradingeconomics)

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Technological factors: German economy has diversified industries with exclusively popular brands like Volkswagen, BMW, Adidas, SAP technology, Siemens, Deutsche Telekom, Audi etc. The engineering and technologically advanced nation will pose IKEA both opportunities and threats at the same time. Germany has wide range of technological advancements and projects where IKEA will find difficulties to maintain its renewable resources accumulation strategy. Renewable energy source is a great challenge for German economy (Heritage.org., 2018). However, as it is a tech goody country, the idea of selling furniture through online and adroit applications will seem opportunistic for IKEA. Germany is world leader in sophisticated cars, chemical industry, turbine industries. The investment in technology is given in the following graph with comparison-

Figure: R&D investment change comparison (Czinkota, 2014)

Environmental factors: Creating eco friendly business environment has become a growing concern for business now a days. Good for IKEA, the company is actually concentrating on eco-friendly materials and resources. Germany had been taken under consideration of being one of the top 5 countries in Europe responsible for more air pollution. The European union has limits for particulate matter and nitrogen di oxide. However, maintain strict environmental rules, Germany has been able to reduce its carbon emissions in 2018. The air quality of Germany has been rated 75.2. which is actually pretty good. The overall pollution index is 27.94 for Germany. IKEA has to maintain environment standards and protection rules of Germany. 7|Page

Legal Factors: German Administration of justice has five particular branches. The laws are applicable to all aspects of life. When expanding business in Germany, IKEA has to consider labor laws, corporate laws, private company operation laws etc. Germany has highly skilled workforce with technical experience. The country has capacity to create and nurture new ideas. Well established infrastructure is also embedded in this country. IKEA has lots of good chances to create a good impression here.

Porters Five forces: IKEA Bargaining power of suppliers: The supplier`s bargaining power against is low as the suppliers are mainly scattered and located inti different parts of the world. The number of suppliers for IKEA is large. Each of them has small size along with their weak financial performance. These obstacles and limitations do not permit them to raise prices IKEA has the access to switch suppliers very quickly and it will be unwise for suppliers to lose IKEA as their partner. IKEA is in the position to set the prices for raw materials. Suppliers has to follow. IKEA with its IWAY, a code of conduct specially designed for its suppliers has been able to control its suppliers very efficiently (IKEA, 2018). IKEA operates thousands of audits every year to check for violations. There are rules about child labor, environmental issues, labor safety and compensation, discrimination etc. Investment in renewable energy is one of the many terms of IKEA and suppliers has to go along with it. The company has invested and agreed to invest Eur 1.7 billion for wind and solar energy. The company has invested to set up 7,50,000 solar panels. In 2017, the company has produced 73% of its energy from this renewable energy sources (Rees, 2016).

Bargaining power of buyers: The bargaining power of IKEA customers is high. Customers now a days are more concerned and aware of what they are buying. Besides, IKEA are selling furniture at affordable prices, they are not selling exclusive specialized products that can be prices high like Griffin goods (Andrews, 2016). IKEA has large market access but it can be very challenging for IKEA to set their prices up as there are many alternatives. IKEA has been using more social media sites like Facebook,

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LinkedIn, twitter pin interest, online forums, YouTube etc. to find out the range of customer satisfaction. IKEA focuses highly on customer satisfaction.

Threat from substitute products: The threat from substitute products are high. There are lot of homeware and furniture companies available. Switching cost is very low for buyers (Suthan, 2016). Germany, the target market has popular furniture brands like Danisches Bettenlagr, Vitra holding, Haworth Europe, Steelcase, USM holding etc. The market share of IKEA depends a lot on other competitor`s price range, furniture quality, business strategy etc. in 2017, IKEA has incurred lots of administrative costs.

Threat from New entrants: The threat of new entrants is low for IKEA. The furniture market in Germany is already quite saturated. Even if some new entrants try to enter the market, they can hardly give IKEA a hard time as it will take years for them to grow the business only enough to pose a challenge or threat. IKEA has already expanded so much. The company has super distribution and transfer network, deep client base, well established market image and satisfactory brand image worldwide.

Level of competitive rivalry: The level of rivalry is intense. In Germany, Danisches Bettenlagr is very popular among locals. Besides it is their very own furniture brand. Other furniture companies are also working to retain market share. IKEA, to create and hold a good position should understand local demands and preferences. The prices of the furniture should be low.

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Recommendation: To be a meaningful part of people`s life, which is one of the long-desired vision of IKEA; the company should try to get itself more engaged with the locality. It will require long term thinking. They need to get plugged with customer`s expectation and the understanding with the customer of widely diversified group can be very difficult. As types, kinds and attires of homes are different around the world, the IKEA company should consider whether it is trying to sell something inappropriate in that particular location. Space and location of home are important to consider before someone buys a piece of furniture. IKEA should work on offering space saving, light furniture and homewares. Another important thing will be to use Germany`s productive farmer groups. Although this country is popular for high end industrial goods, IKEA could use local farms to supply raw materials the company should put emphasis on building trained coworkers’ group so that customer can be served in better and more innovative ways. Customer may choose to interact with the company in many ways. Knowledgeable, co operative and friendly co workers can better serve the customers. IKEA’s general policy should be to work with the government from day one. The company must show respect to the policies, culture and business environment. The company looks forward to developing strong mutual relationship. In today`s era of mobile devices, online shopping is very common. The digital platform of IKEA should get more popular and thus digital marketing should be highly implemented. In today`s changing world, IKEA should be accessible to many. This perspective is very significant in today’s modern world. IKEA should keep focus on what they do best besides their acquisition of other type of companies. IKEA has acquired a venture capital company in 2017 for better usage of their cash reserves.

Conclusion: The economic growth of Germany has been 2.5% in 2017 which is considered impressive as per IMF.IKEA is expected to find it profitable to expand in Germany, a multilayered developed economy of Europe. Being a location with robust development, low inflation and unemployment rate, diversified population Germany actually offers multiple business opportunities for IKEA.

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References: Alan, R. (2018). IKEA: Home is where the heart is. New York: McGraw-Hill Education Andrews, C. (2016). BUSINESS ENVIRONMENT. [S.l.]: PEARSON EDUCATION INDIA. Cia.gov. (2018). The World Factbook — Central Intelligence Agency. [online] Available at: https://www.cia.gov/library/publications/the-world-factbook/geos/nz.html [Accessed 07 Dec. 2018]. Czinkota, M., Ronkainen, I. and Moffett, M. (2014). International business. Hoboken, NJ: J. Wiley & Sons, Inc. Heritage.org. (2018). German Economy: Population, GDP, Inflation, Business, Trade, FDI, Corruption. [online] Available at: https://www.heritage.org/index/country/germnay [Accessed 07 Dec. 2018]. IKEA.

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[Accessed 07 Dec. 2018]. Rees, B. (2016). International trade and finance. Edina, Minn.: ABDO Pub. Co. Stickney, C. (2013). Strategic marketing analysis. Fort Worth: Harcourt Brace Jovanovich Publishers. Suthan, A. (2016). Marketing Fundamentals. SSRN Electronic Journal. Tradingeconomics.com. (2018). Germany GDP per capita | 1970-2018 | Data | Chart | Calendar | Forecast. [online] Available at: https://tradingeconomics.com/germany/gdp-percapita [Accessed 07 Dec. 2018]

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