Porter Analysis Ikea

Topics: Decorative arts, Furniture, Home Pages: 5 (1532 words) Published: March 10, 2013
PORTER Analysis

Competitive rivalry:
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...
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