Porter Analysis IKEA
In United States as in Sweden, we can observe there are some companies operating in the furniture industry and there are many on the market retailers like Home Depot, Wal-Mart, Costco, Euromarket, etc… The import of products from China for all these companies allows them to sell at low cost. These elements therefore tell us that the furniture industry is very competitive. There is an analysis of the rivalry of IKEA in this sector:
IKEA works in a highly competitive industry highlighted by other low priced furniture producers like Galiform (England), Wal-Mart (USA), Euromarket (USA), Argos (England), and others. IKEA has wisely attempted to compete by entering the markets that typically pose the largest competition, such as China and Japan» (Caplan, 2006). IKEA reach a wider market to increase his customers and his market share. The company is, in the world, the leader in the industry of discounted furniture. For the customers, IKEA is the most in delivering the complete package, there are equivalent to those of furniture IKEA but value for money, IKEA is leader. The trust in customers about product quality, the global brand name and the design very popular design has given IKEA a competitive edge.
To conclude, IKEA diversify this products with the food, textile and mobile industry so we can add Sainsbury’s, Tesco, Asda for UK food or Virgin, Vodafone and O2 for mobile to the list of IKEA’s competitors. Threat of New Entrants: Capital requirements – The need to invest large financial resources make it difficult for a competitor to enter a new market, because they have to commit money up front with no guarantee of returns in the end. This positively affects IKEA, in a short term because any new entrants will have to invest a large amount of capital in order to compete with them.
IKEA has already a vast supply chain and its brand is already unique and known in a large scale and a new entrant in the furniture market would need a very large amount of money to establish its brand and practice low prices as IKEA do. Supply-side economies of scale – “Economies of scale are factors that cause the average cost of producing something to fall as the volume of its output increases”(The economist). IKEA is positively affected by supply side economies of scale, because it is large enough for it. They make economies of scale as they use better technology and they also have a very large supply chain.
Due to this, when new competitors enter this market, they will have a higher cost of production, because they have smaller economies of scale. Demand side benefits of scale – “Network effects arise in industries where a buyer’s willingness to pay for a company’s product increases with the number of other buyers who also patronize the company”(Harvard Business Review). This is a good point to IKEA as it has a large number of customers than the new entrants. The customers would prefer to buy IKEA products than the products of the new entrant.
Incumbency advantages independent of size – IKEA has an advantage because they have an established brand, this is a strong competitive advantage in a short term compared to new competitors. In this case entry barriers in the furniture market are high; this is an advantage to IKEA. On the other hand, IKEA stores are not present in many small towns; this is an opportunity for the new competitors to move into small and midsized cities where there are smaller stores and less selection. Even though it is not easy because new entrants would have to provide a large supply chain.
Threat of Substitute: The threat of having substitutes in the home furnishings industry seems very low as there is no specific product, which can substitute the furniture. If we look at the definition of “substitute” proposed by Jean-Marc LEHU, we can say that in the industry of furniture manufacture, probability of substitutes is almost impossible. Possible threat of trend changes exists, i. e. there is growing orientation towards greater manufacture of furniture made from other materials than wood, that is, various metals, plastics and glass.
However, despite the reduction of wood in furniture manufacture in the past years, wood is expected to stay one of the most important raw materials for furniture manufacture, because of its advantages when compared with other materials. As the market is becoming more environment concerned many firms are giving slogan to go green. But the basic functional demand has remained the same. So it is safe to say that there are no threats of substitutes. Buyer power: When we speak about buyers who are concentrated, we understood that there are few buyers and many sellers.
In the home furnishing industry, there are indeed many sellers, of different sort, like furniture retailer, department store or big brand too. But in the same time, the number of all consumers is not comparable. Nowadays, each person in the world needs home furnishing, never mind the country or the social status. So we cannot say that buyers are concentrated in the home furnishing industry. When the home furnishing industry concerns individuals, they don’t buy large volume except for special occasions. Home furnishing concerns purchase of something reflective or rather useful.
We cannot buy home furnishing the same way as we buy food. Conversely, companies can buy easier large volume than individuals, but they don’t represent the bulk of buyers. As mention previously, there are many home furnishing stores around the world in order to satisfy or attract more and more consumers. These numerous competitors are in different sectors in office their size. Each company have to make their different with their price, products and service as add value, to response buyer’s needs. The most of the companies in the home furnishing industry try to make the difference in having low price to lure buyers.
For consumer, when a product, that he wants, it’s too expensive or not at his taste, it’s really easy for him to go to other stores. And buyers know that there are numerous alternatives sellers that give them power. Switching costs means that if a consumer compares the similar product from one seller to another seller, there is not a high difference of price. Indeed, in home furnishing industry, we cannot that the entire price are practically in the same price. We can remark too that the most of the products are similar that means they’re “standardised”.
We can take the example of a whisk in five different stores (four presents in Ireland and one in France) Stores Price IKEA 6€50 Debenhams 5€ Mark & Spenser 7€50 Woodie’s DIY 5€ Alinéa 5€90 That chart show that all of the stores have practically the same price for exactly the same product. So we can say that buyers have a high power of negotiation with the several alternative sellers, the low switching costs and with the products that are standardised. Supplier Power: The supplier power in the home furnishings industry is quite low for numerous reasons.
According to a French documentary, the number of supplier all over the world is huge. Most of these suppliers are located in the developed countries (Japan, Australia, Europe, Canada…). Each company has its own supplier. The suppliers have no influence because they can be substituted. (Gérard Poitou-Weber, 2007). Yet, the customers in this industry are fragmented. The companies of this industry are implanted worldwide; every country has at least 5 companies of home furnishings that informed us how this market is developed.
It appears that the suppliers of every home furnishings store are neither powerful nor famous. Each company is provided by different suppliers. The biggest companies have at least 500 suppliers from 20 or 30 countries (El pais, 2006). Based on this information, we can suppose that it could be difficult for a supplier to become a key competitor. Of course, they still can integrate the market, but it’ll on a small scale. Suppliers have not that much power because they depend a lot on the companies they provide.
It’s the companies from home furnishings industry which decide who will be their suppliers and they have a lot a choices. Most of the suppliers would go bankrupt without IKEA, M&S or Alinea. Big companies nearly impose the price of the items they want to buy from the suppliers (Alexandre DEBOUTE, Le Figaro, 2010). To conclude, the example of IKEA’s suppliers can illustrate the lack of power for the suppliers. The Franchisor IKEA Website provides us a large amount of figures that can show the low power of their suppliers.
Ikea owns 338 stores but have about 1300 suppliers from 53 different countries. None of them can seriously think about integrate the market and try to compete with IKEA. IKEA also owns manufacturing company like SwedwoodManufacturer. So it is evident that IKEA can threats the suppliers to enter into their business. In a nutshell, the supplier power in the home furnishings industry can be defined as quite low because of the numbers of suppliers, the numbers of home furnishings companies and the status of the biggest companies.
