IKEA's Furniture Sector in China through Porter's Five Forces

PART 1 – INDIVIDUAL ANALYSIS

Porter’s 5 forces analysis of the sector

For analysing the market conditions of furniture or home furnishing sector in the context of IKEA in China, the application of different elements of porter’s five force model is carried out below:

Bargaining Power of Buyers: The assessment of bargaining buyer in the context of furnishing and furniture sector. There are several companies offering similar types of products in the market. Therefore, consumers are having a large portfolio of brands along with their products for making a purchase decision. In the case of China, people are too sensitive for the pricing different types of furniture products so as customers can easily switch their purchase decisions to other low-cost products. Therefore, IKEA has recorded the high bargaining power of buyers as a result of large number manufacturers and low switching cost.

Threat of Substitution: In the context of corporate planning and decision making, companies have to consider the popularity of substitute products. In the context of furnishing and furniture sector of China, several companies are manufacturing a wide range of traditional furniture products. Therefore, companies like IKEA who are offering different kind of modular furniture are facing the high threat of products substitution in China.

Bargaining Power of Suppliers: The role of supplier has been enhanced in the context of contemporary business operations to attain sustainability and pricing goals. In the context of furniture sector of China, there are various suppliers available for the raw material used by IKEA. Therefore, IKEA could maintain the availability of different supplies and raw materials from the large number of potential suppliers in low price. Therefore, the bargaining power of suppliers is relatively in the furniture and other related products. This thing influences furniture manufacturers to assess supplies from different domestic and international suppliers to attain the cost control related objectives.

Business Rivalry: It shows the level of market competition among companies. In the context of furnishing and furniture sector of China, various online and offline retailers are offering the similar types of products. Therefore, all companies are paying huge attention to sustain their market share. Overall, there is huge business rivalry identified among companies. The rivalry among companies would provide better product offering to customer in terms of pricing and quality.

Threat of New Entry: The assessment of market trends in the context of furnishing and furniture sector of China has determined that various new companies are expanding their businesses in the field of furniture sector. Therefore, the threat of new entry is high because various new companies are considering the innovative approaches to assess an appropriate level of market share within highly competitive market trends. Therefore, the management of IKEA should have to pay significant attention on innovative ideas the product offering and selection of product portfolio to manage the high level of market competition.

PART 2 – ISSUES

Explaining the main strategic issues (external and internal)

For determining different strategic issues of IKEA, the assessment of company’s weakness and threats provides a great support in assessing internal and external strategic issues, respectively. As per the case, the assessment of internal and external strategic issues is carried out below:

Internal strategic issues

Application of quality and safety standards: As per the case, IKEA has addressed several legal actions from the government agencies in China a result of clumsy handling of product recall. This thing has put questioned on the company’s safety standards that are varied in different countries. In 2016-17, the Swedish furnishing company has recalled more than 1.7 million chests of drawers in China. Moreover, the IKEA has also recorded several controversies associated with the product quality and other application of other safety guidelines. In the context of contemporary business operation, the success of organisation is significantly aligned with quality of services and products. These issues are aligned with internal weaknesses of business entity and may leave adverse impact on the long term organisational sustainability.

Consideration of slow market expansion strategy: By considering the case of IKEA, it has found that IKEA has faced huge criticism for its inability to manage an appropriate amount of market share within Chinese market with consideration of aggressive business plan in like other competitors. It has been perceived the IKEA has to change the brand positioning strategy in the context of Chinese market. This is because the IKEA business strategy is significantly aligned with different variables of corporate planning and resource management to manage price cuts.

Selection of appropriate pricing: The IKEA entered in the Chinese market with focus on existing the low pricing strategy, but it was not being perceived as low-cost brands in China. In the China, people perceive the IKEA from its innovative product range and it was being preferred by the wealthy customers. In the context, perception of price sensitive customers may leave adverse impact on future business revenue along with organisational sustainability.

External strategic issues

Cultural issues: The management of IKEA has faced several issues in assessing the perception of people towards the furniture and the influence the culture and traditions over the people’s purchase decisions. This thing leaves the negative impact on the IKEA’s capabilities in order to restructure the product offering. As per the case, the management of IKEA apologized for the television commercial in China because it pulled it from the air after it provoked a backlash in the Chinese social media. People presented their objections for some scene presented in the advertisement. This advertisement influences the discrimination against the young unmarried women in China so as the IKEA was being accused to promote the discrimination against women in China. In this context, the IKEA also criticised for the lack of cultural awareness in development and execution of different types of marketing plan. Moreover, IKEA faced a significant criticism for being too conservative in the developing the home product sector like China. In some locations, IKEA faced some issues in the creation of customer friendly environment.

Increase in the market competition: In the context of Chinese retail market, various domestic and international are expanding their business in the field of furniture sector with consideration both online and offline distribution channels. This thing could create a significant challenge to IKEA to attain the long-term business sustainability goals in an efficient manner. Moreover, the emergence and growth of various online sales channels has created various strategic issues for the IKEA within the Chinese retail market. Therefore, the business entity to restructure its business processes and other operations to assess the competitive advantage within highly competitive market trends.

Global economic crisis: The global economic crisis have leaved adverse impact on the sales and market position of different companies in all over the world. In the present case, it has addressed that Moody’s Investor Service, and S & P Global Rating downgraded the credit rating of China as a result of a significant increment in debt and application of China’s preferential conditions for different domestic firms. This may leave adverse impact on the expansion strategy of IKEA within China.

Sourcing of green and environmentally friendly products: In the ase of IKEA, the business entity is always paying huge attention to support the sustainable sourcing of a variety of raw material. Therefore, the IKEA also tried to consider those suppliers in China who could maintain the availability of green or environment friendly materials for different product range, but company faced some issues in identification of appropriate suppliers that could attain the green initiatives of business entity in China. Therefore, IKEA focused on those suppliers to meet the market demand who have not followed the green initiative in sourcing of a variety of materials in China.

PART 3 – OPTIONS

Identifying three strategic options to resolve as many of the above strategic issues.

Option 1- Redesigning the organisation: For dealing with the above issues, the IKEA is looking to reduce its organisational structure with consideration of the business trends in China. This new structure would be aligned with strategic partners of companies in China. In this context, company applies different approaches of investment such as joint ventures, partnership and development of a variety of strategic alliance to enhance the efficiency of business operations with consideration of country specific environment of China. It has been perceived by the management of IKEA that the new structure will enhance the efficiency of IKEA as compared to its existing franchise model so as the business entity would be able gain more culturally sensitive and other operational control. This approach will enhance the organisation’s preparedness about different cultural challenges in China and it would support the organisation in managing the sustainable sourcing of a variety of raw material in an efficient manner.

Option 2- Consideration of multichannel retailing: For establishment of better market presence and attainment of needs of a variety of customers, IKEA is focusing on the multichannel retailing operations. In this context, the consideration of ecommerce or online channels would enhance organisational connectivity to those customers who are living in the remote areas. The application of internet-based business operations will improve the interaction of IKEA with customers so as organisation would be able to predict the consumption pattern of consumers. This thing will provide the competitive edge to business entity within highly competitive market trends. It would save the business expenditures in lowering the implications inappropriate economic and market conditions.

Option 3- Development of new quality Standard and Mass production: For dealing with the product quality issues, the IKEA is looking to adopt different quality standards that would be aligned with the expectation of customers in China. Moreover, the IKEA require to follow its existing strategy of low pricing in which the company is focusing to pay extra attention on the mass production in which the business entity tied up with various local suppliers and also promotes the sustainable sourcing of raw material. In addition to that, the IKEA has tried to establish different warehouses in different locations in China for controlling different objectives of cost control. By promoting the mass production with the seamless supply chain, the company could enhance the quality of different products and efficiency of pricing strategy. This is because the production and logistics management have been perceived as the most critical element of business planning and operational control through which an organisation can resolve a variety of strategic issues. The low pricing would support the IKEA in assessing the competitive advantage within highly competitive market trends.

Evaluating these options using Suitability, Feasibility and Acceptability criteria

As per the strategic issues of IKEA, all the selected the options are appropriate to enhance the operational capabilities of business entity. In the context of Suitability, the option 1 and 3 will offer higher benefits to IKEA in attaining the long-term sustainability goals in an efficient manner. Therefore, the option 1 and 3 could be perceived as the most suitable option for IKEA. In the context of Feasibility, the option 2 and 3 would be emerged as the cost effective solutions for IKEA and it could be implemented in short time schedule. However, the option 1 associated with organisational restructuring would enhance long term business sustainability but it would consume more time to execute in the organisation. In the context of Acceptability, the option 1 and 3 need to implement by the organisation in the proactive manner that could enhance overall organisational capabilities to manage a variety of market challenges and strategic issues.

Identification of the most preferred option(s) with reason

For dealing with different strategic issues, the IKEA should have to enhance its attention over the possible options associated with organisational restructuring, and development of new quality standard and mass production to enhance overall corporate capabilities of IKEA in China. This is because these measures would enhance the organisational capabilities to manage relationship with business partners and it would enhance the organisation’s understanding about the role of culture in the purchase decisions of consumers in China. Apart from that, the mass production with appropriate logistic management would help manage to cut the prices of a variety of material without hampering quality so as IKEA could maintain the competitive edge over other brands.

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