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Five Forces Analysis of IKEA

Five Forces Analysis of IKEA

IKEA is a well known Swedish brand of home furnishing products.  Today there are 296 total IKEA stores running in 36 countries/territories. It sells a large range of nearly 9500 products. The brand uses a variety of store formats to reach its consumers.  Two main reasons behind the growing popularity of the brand globally are low prices and good quality of its products.  IKEA is both financially strong and has a strong brand image. The focus of IKEA has remained on customer convenience and product innovation.  While its products are good in quality they are priced competitively to attract customers in large numbers the customers have a variety of options before them, which are affordable. Cost leadership and product quality has enabled IKEA to become a market leader.  This is a five forces analysis that helps know how these forces affect the competition for IKEA.   It is based on Porter’s five forces model. These five forces are there in every industry and business and affect the attractiveness and competitiveness of the industry.  This model can help businesses and business managers at planning and strategy formulation for business success.

Bargaining power of suppliers:

The bargaining power of IKEA suppliers is low because while their number is large their small size and weak financial position does not allow them enough clout. IKEA can easily switch from one supplier to another whereas if a supplier loses business from IKEA, it can be a difficult situation for him.   As a result IKEA gets to set the rules of the game and its suppliers are required to follow. IKEA has launched a code of conduct for its suppliers called IWAY.  These suppliers are also responsible for communicating the code of conduct to their sub suppliers. IKEA conducts around 1000 audits each year and checks regularly for any kind of violations. It has formed rules related to child labor, discrimination, minimum wages and safe working environment. The suppliers must comply otherwise they can be removed. In this way, you can see that between IKEA and its suppliers, the brand has the upper hand.

Bargaining power of buyers:

While the bargaining power of individual buyers is insignificant in case of IKEA, as a group they hold some significant clout which is why there is so much focus on attracting and retaining the customers. Customers across all the industries have grown more empowered in the 21st century. Apart from increased competition, technological growth has brought this change about. The balance is now tilted in the favour of the customers.  IKEA also focuses heavily on marketing and promotion. While its pricing strategy is made to suit the customers’ pocket, it has also focused on digital marketing and ecommerce for a better shopping experience. Overall, the bargaining power of the buyers can be understood as low to moderate. The factors that moderate the bargaining power of the buyers are the low prices, good quality of IKEA products and the marketing strategy of IKEA.

Threat from substitute products:

The threat from substitute products for IKEA is low. There are several factors that moderate this threat. One of them is brand image. Through years IKEA has built a reliable brand image where the level of trust between the customers and the brand is high. Its affordable pricing strategy and customer service also moderate the threat from substitute products. However, the most important factor is the availability of the large range of products under one roof. Hardly one of the competitors offers such a wide range of products. Based on all these factors including the popularity of IKEA and its products, the threat from IKEA gets minimized.

Threat from New entrants:

The threat of new entrants entering the market and stealing market share is low to moderate. New brands can enter on a smaller scale but then they will not have any major effect on the business of IKEA. There are several players in the home furnishing, most small players. If a new brand enters the market, it will take it time, efforts as well as investment to grow into a large brand and grab a large market share. Apart from infrastructure and human resources, innovation and strategy al can be time consuming and requiring major investment. Marketing is also a major cost apart from operations. The barriers to entry are low but there are still some major barriers in the way of becoming a large and well known brand. So, all these factors minimize the threat from new players keeping it low to moderate.

Level of competitive rivalry:

The level of competitive rivalry in the home furnishing industry is moderately high.  The battle for market share is not as high as in several other industries but still IKEA has got a large number of competitors.   Apart from the home furnishing brands that compete directly with IKEA, the  super markets and brand stores also sell home furnishing products and pose a competitive threat to IKEA. IKEA’s popular and reliable image, its marketing strategy and other factors like affordable pricing have helped it gain a large customer base. These factors act to moderate the competitive threat from the other brands. Overall, the level fo competitive rivalry gets to be moderately high.

Sources:

https://www.ikea.com/ms/en_AU/about_ikea/facts_and_figures/ikea_group_stores/index.html

https://www.ikea.com/gb/en/this-is-ikea/people-planet/people-communities/suppliers/

 

Written by Abhijeet Pratap

Abhijeet has been blogging on educational topics and business research since 2016. He graduated with a Hons. in English literature from BRABU and an MBA from the Asia-Pacific Institute of Management, New Delhi. He likes to blog and share his knowledge and research in business management, marketing, literature and other areas with his readers.

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