Porter’s Five Forces model is “a generic framework that deconstructs industry structure into five underlying competitive forces or variables”. IKEA Porter’s Five Forces are represented in figure below:
Porter’s Five Forces
Threat of new entrants to furniture and home appliances manufacturing industry in general is significant. The following set of factors, among others affects the intensity of threat of new entrants into the industry.
1. Lack of regulatory or technological entry barriers. There are no legal or regulatory barriers to enter the furniture industry. Moreover, knowledge barriers are not substantial as well because furniture producing processes do not involve advanced know-how that is difficult to replicate.
2. Economies of scale. IKEA benefits from the economies of scale to a great extent internationally and this advantage allows the Swedish furniture chain to maintain highly competitive prices. No new market entrant would be able to utilize economies of scale to IKEA’s extent and thus, competing with IKEA on price level remains as a highly challenging, if not impossible task. Such a situation discourages potential new players to enter the industry.
3. Distribution channel barriers. Although there are no regulatory or technological entry barriers as discussed above, distribution channel entry barrier exists. It took more than seven decades for the Swedish furniture chain to establish its global distribution network that comprises more than 500 locations in 63 countries. Without such an extensive distribution network it will be hard for new market entrants to present any real threat for IKEA.
Bargaining power of buyers in furniture and home appliances manufacturing industry is huge. The following factors increase buyer bargaining power:
1. Absence of switching costs for customers. Currently IKEA lacks an ecosystem of products and services that is able to retain the customer through customer switching costs. Therefore, customers are able to switch to an alternative furniture seller without additional costs. The absences of switching costs increases customer bargaining power to a considerable extend.
2. Price sensitivity. IKEA pursues cost leadership business strategy and this strategy has certain implications on customer bargaining power. Specifically, price sensitivity is positively correlated with customer bargaining power in a way that if the furniture retailer is unable to sustain its competitive prices it may lose customers. Alternatively, for a business pursuing product differentiation business strategy, such as Apple Inc. higher product prices do not usually alienate customers because the brand value proposition is advanced features and characteristics of products, not the cheapest price.
3. Size and concentration of buyers compared to suppliers. Buyer size and concentration is positively correlated with their bargaining power. In the global furniture industry the size and concentration of buyers compared to suppliers is significant and accordingly, buyers possess a considerable bargaining power.
The bargaining power of IKEA suppliers is limited. The following considerations relate to the supplier bargaining power:
1. Importance of volume to suppliers. IKEA is the largest furniture retailer in the world and accordingly it can place high volume orders to many suppliers. Volume of orders is important to any supplier to grow their business. For IKEA’s many suppliers IKEA is their largest customer if not the only customer. Accordingly, due to its high volume of orders the Swedish furniture chain possesses immense bargaining power in relation to its suppliers and exercises this power extensively.
2. Limited potential for forward integration for suppliers. As mentioned, the home improvement and furnishing chain has advanced global distribution channel with more than 500 locations in 63 countries. It is highly challenging for suppliers to pursue forward integration strategy because of inability to develop distribution channel of a similar scale. This fact limits supplier bargaining power.
3. Size of suppliers. IKEA produces some of its products in-house, but the majority of products (89%) are sourced from external suppliers across the globe. The world’s largest furniture retailer purchases from hundreds of suppliers worldwide and no individual supplier accounts for more than 10% of purchases. Miniature size of suppliers in relation to IKEA has a detrimental impact on their bargaining power.
IKEA Group Report contains a full analysis of IKEA Porter’s Five Forces Analysis. The report illustrates the application of the major analytical strategic frameworks in business studies such as SWOT, PESTEL, Value Chain analysis, Ansoff Matrix and McKinsey 7S Model on IKEA. Moreover, the report contains analyses of IKEA leadership, business strategy, organizational structure and organizational culture. The report also comprises discussions of IKEA marketing strategy, ecosystem and addresses issues of corporate social responsibility.
Nemati, H.R. & Barko, C.D. (2004) Organisational Data Mining: Leveraging Enterprise Data Resources for Optimal Performance, IGI, p.29