IKEA PESTEL Analysis: An Analysis of Impacts of External Factors
PESTEL is a strategic analytical tool used to assess the impact of external factors on businesses. The acronym stands for political, economic, social, technological, environmental and legal factors affecting businesses. It is important to clarify that businesses have little and no influence over factors within PESTEL framework; however they can develop strategies to eliminate or at least to minimize negative effects of these factors. IKEA PESTEL analysis can shed a light into opportunities to strengthen competitive advantage of the business in various fronts.
Political Factors in IKEA PESTEL Analysis
IKEA revenue is subject to political situation in the market and a wide range of political factors such as government attitude towards the brand and political stability. Other political factors that can affect IKEA’s business include the level of bureaucracy, degree of corruption, home market lobbying and import restrictions in markets where the global furniture retailer operates.
Use of Prison Labour in East Germany
The company has been involved in a series of issues on political grounds. In 2012, IKEA had to admit that the company used prison labour in East Germany in 1970s and 1980s to produce its products. It has to be specified that the use of prison labour took place at manufacturing sites of IKEA suppliers, not the sites managed by the retail giant itself. An independent report by Ernst and Young concluded that while IKEA had a policy of visiting production facilities to control working processes, access to East German suppliers had been restricted.
Although IKEA offered formal public apology to those affected, the incident caused a significant political controversy around the globe.[1] Moreover, allegations that IKEA founder Ingvar Kamprad was an active recruiter for Swedish Nazi group has sparked controversy with negative effects on the brand image.[2]
Symbolic Role of Doll Lufsig
Another noteworthy instance of the impact of political factors on IKEA relates to its doll called Lufsig, which is a Swedish word for ‘clumsy’. While translation of Lufsig into Chinese does not cause any issues, in Cantonese dialect Lufsig sounds similar to insulting term ‘mother’s c***’.
In 2013 a photo of an incident where a protester threw a Lufsig toy at Hong Kong’s chief executive, Leung Chun-Ying gained media attention causing Lufsig toy gaining a symbolic role among Cantonese people dissatisfied with the government in Hong Kong. Lufsig had sold out in Hong Kong within a single day and Facebook page dedicated to the spoof pictures of the toy in various locations was created, marking the political turn of the incident.[3]
Lack of Lobbying by IKEA
Although the furniture retailer engages in lobbying activities, the level of such an engagement is minimal. As it is illustrated in Figure 1 below, the world’s largest furniture retailer spent only USD 120000 in 2021 in total to lobbying activities, which is significantly lower compared to lobbying spending of other multinational companies of similar sizes.
Figure 1 Annual Lobbying by IKEA[4]
Economic Factors in IKEA PESTEL Analysis
Macroeconomic situation and consumer spending power is one of the most significant economic factors that affect IKEA performance, as well as, the performance of any business entity. The global economic and financial crisis of 2007 – 2009 is a stark example for the impact of external economic factor on businesses. However, it is important to note that the negative impact of the crisis was at a lesser extent for IKEA compared to many other businesses due to the cost leadership strategy of the business. Specifically, although IKEA had to eliminate 5,000 jobs, the volume of sales dropped only by 1 per cent by the second quarter of 2009.
Changes in Currency Exchange Rates
IKEA revenues are directly affected by exchange rate fluctuations between EUR and USD and other major currencies due to the global scale of business operations. At year-end 2021, the total net fair value of the derivatives used to manage exchange risk is EUR 43 million positive (FY20: EUR 36 million positive).[5] The world’s largest furniture retailer attempts to address the impact of changes in currency exchange rates through engaging in hedging initiatives.
Particularly, the company has accepted sourcing and producing products locally as one of the main tools to deal with changes in currency exchange rates. For example, amid weakening pound against euro and dollar, the Swedish furniture chain planned to double the numbers of products made locally in the UK, so that it can decrease the negative impact of currency exchange rate for the business.
Fluctuations of Costs of Raw Materials
Fluctuations of costs of raw materials such as wood and metals IKEA uses is a major economic factor that also impacts the business significantly. For example, as it is illustrated in Figure 2 below, lumber prices in the US have increased dramatically in 2020 and 2021 and similar tendencies persist in other regions as well.
Figure 2 Changes in lumber prices in United States (USD per thousand board feet)
Similarly, the price of another important raw material for the furniture retailer, metal has been highly inconsistent. This can be highlighted as another economic factor that can affect the bottom line for the world’s largest furniture retailer.
IKEA Group Report contains a full version of IKEA PESTEL analysis. The report illustrates the application of the major analytical strategic frameworks in business studies such as SWOT, Porter’s Five Forces, Value Chain analysis, Ansoff Matrix and McKinsey 7S Model on IKEA. Moreover, the report contains analyses of IKEA business strategy, leadership, organizational structure and organizational culture. The report also comprises discussions of IKEA marketing strategy, ecosystem and addresses issues of corporate social responsibility.
[1] Connelly, K. (2012) The Guardian, Available at: http://www.theguardian.com/business/2012/nov/16/ikea-regrets-forced-labour-germany
[2] Bradford, H. (2013) Huffington Post, Available at: http://www.huffingtonpost.com/2013/03/18/ikea-secrets-horse-meat_n_2411475.html
[3] One Sky Blog (2013) Available at: http://www.oneskyapp.com/blog/lost-translation-ikea-toy-became-political-symbol/
[4] Open Secrets (2022) Available at: https://www.opensecrets.org/federal-lobbying/clients/summary?cycle=2019&id=D000042682
[5] Inter IKEA Holding B.V. Annual report FY21