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Porter Five Forces Analysis: The Example Of IKEA

Industry Analysis: The Porter Five Forces

In this blog post, we will discuss The Porter five forces using IKEA as an example, we will elaborate on how this tool can be used by an organization to have a bird-eye view on the industry.

porter five forces

In 1979, Michael Porter at Harvard business school suggested a business plan divided into five parts for a better “SWOT analysis”. The objective was to aid business enterprises increasing their profit in the market. The Porter five forces have become the main tool for the analysis of an industry. These forces evaluate the rivalry of the market and derive its magnetism. This study identifies and analyzes five (5) competitive forces that shape every industry, and helps determine an industry’s weaknesses and strengths. The Porter Five Forces tool is a simple but dominant tool for understanding where power lies in a business situation.

They are:

  1. Rivalry in the industry
  2. Power of suppliers
  3. Power of customers (buyers)
  4. Potential of new entrants into industry (barriers to entry)
  5. Threat of substitute products

The framework of Porter five forces industry analysis content three externals and two internals forces. The rivalry from external/outside refers to the micro and microenvironment.

Rivalry within the industry

Industries that held high-profit margin will attract other firms to enter its market. Therefore in the short run, the new entrant that cannot stand the rivalry will leave and the profit margin of the industry remains unchanged. However, in the long-run, the new entrant will take part of the profit margin share; hence reduce the other firms’ profit to break-even (total revenue equal total cost).

The competition in the furniture industry is moderate. However, there are a lot of major players. Furthermore, there are a handful of retailers in the economy, selling furniture at low cost and providing the discount as well like IKEA. Some of those retailers are Wal-Mart Stores Inc, Argos, Galiform plc, and others. Also, many other retailers import and sell furniture it in the market at a low price like IKEA. Nevertheless, IKEA still remains the leader in consumer discount and low-cost

Bargaining power of suppliers

Suppliers’ bargaining power increase when:

    • Suppliers are few in number
    • Suitable substitute products are not available
    • `Suppliers’ goods are critical to buyers’ marketplace success
    • Suppliers’ products create high switching costs.

In order for a firm to bright in the business world, it must control its supplier. This is because when the suppliers have high control over your raw materials, the firm they will “rule” your company indirectly, charge a high price to your raw material and sometimes they will not design as you requested. The company, the firm will be left with no other choice but to increase the price of its output in other to increase your revenue. However, when the price of the company’s product increases, its demand will reduce therefore leaving the company in a dilemma.

In the case of IKEA, we can safely say that the power of the supplier is low. The company is having a well-established relationship between each of its suppliers around the world. IKEA had about 1380 suppliers until 2008 in 54 countries with 21% of them in China. In addition, IKEA owns a manufacturing company: “Swedwood Manufacturer”. By having its own manufacturer, it is obvious that the corporation threats the suppliers by entering their industry. Furthermore, with the advantage of having its manufacturing firm, the company can produce at low cost and sell at low prices.

Bargaining power of buyers

When analyzing the buyers’ power, one must ask himself “how easy it is for buyers to drive prices down”. This is determined by a number of buyers, how important is each buyer of the firm, the cost to the customer to switch from your product/services and chose your competitors’ products/services

Many retailers in the industry are involved in the war price against each other. They are mostly importers who get their inventory from China as well with a direct competition in the market. By having all these other retailers in the market, the consumers have a choice between lots of firms/manufacturers. With all so many opportunities open to them, the buyers’ power is moderate to high in this industry. However, most of the consumers will go to IKEA because of the company’s brand, its convenience, and also its main feature low-cost product along with consumer’s discount.

Threats of new entrants

The new entrants affect the power in the industry. If the requirements to enter the industry and compete efficiently is low/short (time and money), and if the firm has not achieved economy of scale, the new entrants will rapidly take down such a firm. However, if the business is strong or the barrier to entry is high, then it can conserve its position and advantages in the market.

The barriers to entries are relatively low. However, the intensity of the rivalry in the industry may fright off new entrants. The beginning capital required is too high. Anyone can start a retail shop with a small capital. But if someone wants his company to have a major strength in the industry, he/she needs to get more capital in the firm, have a reliable warehouse, and establish a nice buyer-supplier relation with its supplier. It will take a lot of time, high investment in order for the new entrant to acquire all the necessity to become a major player in the industry; otherwise, the firm will compete on the side. We can safely say that in the short-run, the new entrants are not a major threat for IKEA.

On the other hand, in the long-run, those small retailers will become high threats as competitors for the company. Therefore this factor has an average impact on IKEA.

Threats of substitutes

The threat of substitute products increases when:

    • Buyers face few switching costs
    • The substitute product’s price is lower
    • Substitute product’s quality and performance are equal to or greater than the existing product
  • Differentiated industry products that are valued by customers reduce this threat

This force has a low influence on the company. This is because; there are no substitute products which for furniture, home applicant and other products supplied by the company. Furthermore, The Company is specialized in manufacturing, good quality, and low-cost furniture. Even though customer retention rate remains best with IKEA and Argos; nevertheless, the combination of the firm’s characteristics are yet to be matched by its competitors. IKEA brand perception ‘trendy’ also surpass Argos ‘affordability’ and John Lewis ‘quality’ (Mintel Oxygen,2010), due to unmatched product and service functionality.

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The Best Freelance Content Writer In Malaysia

The Best Freelance Content Writer In Malaysia

Freelance Content Writer In Malaysia: In this article, we will discuss on the PEST Analysis using the example of IKEA.

Francis Aguilar a Harvard professor is referred to as the inventor of this tool. He called it ETPS – Economic, Technological, Political, and Social– as the four main components to scan the external Business Environment in his 1967 book “Scanning the Business Environment”. Within the next couple of years, the name “ETPS” was adjusted to create a current abbreviation: “PEST”.

freelance content writer in malaysia

Sample writing on PEST Analysis: The example of IKEA

Political Factors:

These factors affect the companies in terms of legal issues and government regulations and define the formal and informal rules under which any businesses must operate when in that specific country. Examples are: Political stability, Tax policy, Employment and labor law, Tariffs, Trade restrictions, etc

The income after tax of any firm in a market is affected by the level of corporate taxes imposed by the political authorities. Therefore, the taxes reduce the profit of the businesses. For example, the tax is posed by the United Kingdom (UK), Unites States (US) and Japan is respectively: 30%, 35%, 42% (PwC, 2012) of the business profit. Thus, IKEA’s regional profits are facing regional tax laws.

In addition to the corporate tax, tariffs and trade restrictions affect the business as well. Some of the main reasons for imposing trade and tariffs are protecting new industries, local employment, and national security. When tariffs are imposed, on imported goods, the price of those goods will increase, which will benefit the local manufacturers who are not obligated to reduce their price. In the case of IKEA Company, who relies on the local manufacturers for its inventory rather than the external manufacturer; allow the company to sell at the local market’s price. Hence, the trade barriers and the tariffs have a low impact on the company’s profit.

The political stability of the country is the main component of the political factors that affect the businesses. In Poland, for example, after the communist government collapsed (1945-1989), the political situation of the country dramatically changed; affecting the relationship between buyers and seller of the company. (Ella Odrowaz, November 10, 2009). Likewise about 20 to 30 years ago, part of the IKEA’s suppliers in East German forced political prisoners to manufacture products that sold to the retailer (The Blaze, 2012a). The company’s connection with accused suppliers, in the middle of political unsteadiness of the country, negatively affects business and consumer view of the corporation.


Economic factors

Represent the factors which affect the business decision making and operations of the firms. These factors include Inflation rate, Interest rates, Economic growth…

The economic growth of a market influences the revenue of its firms. For instance, countries with rapidly growing economy provide a high standard of living. Therefore, the disposable income of the consumer increase along with its purchasing power, thus the demand also increases as well as the firms’ profits. The emerging economy (China, Vietnam, India…) showing high economic growth, assure a bright future to IKEA Company.

The inflation rate is an important factor affecting businesses’ profit by reducing the consumers’ purchasing power. For example, the high inflation rate in the United Kingdom (BBC news 2012) changed the consumer’s behavior and generates the shortage of recourses caused by the destabilizing market which had a negative effect on IKEA by dramatically decreasing its profit in the UK.

Another factor such as the cost of labor has some impact on businesses as well. In countries like China and India popular for their low-cost yet skilled labor, offers the company high-profit margin. That is the main reason why IKEA opened a manufacturing firm in China, improving the low-cost strategy of the corporation.


Social factors

Refer to demographic and the cultural aspects of the environment. For example, when the consumers become more health conscious, the demand for the firm’s product may reduce. Other examples include Age distribution, Population growth rate, Emphasis on safety, Career attitudes.

Changes in demographic variables (age, family size…) of countries influence the strategic decisions taken by firms. For example, aging population such as Japan and Germany are less likely to buy furniture. However, young populations demand more value of money and simplicity item such as beautifully designed furniture such as IKEA’s products.

The demands of some products are influenced by demographic changes. For example, a large shift from rural to urban area by the population will lead to an increase in the demand for furniture (low-cost) since new families need to settle down. IKEA will become one of the best choices. Therefore, the revenue of the company will increase.

In the same way, fashion trends, cultural factors, consumer’s behavior and taste also control demand, less bulky, trendier, and easy-to-assemble furniture.


Technological factors

These factors influence the cost-quality of the outputs. They determine the barriers to entry as well as the minimum level of efficient production. Technological Factors include Automation, Technology incentives, Rate of technological, change R&D activity.

Easy access to the retailer’s online store provides IKEA with large selling opportunity. Furthermore, technology improvement in the retail section such as mobile and online payment, member cards; help the consumer to experience easier

The company has a unique attribute in the industry such as self-assembly. This attribute allows the company to transport its products in flat-packs dropping the risks of damage the furniture while delivering the product.

The increasing popularity and reliance of businesses on social media as an unconventional marketing channel benefits firms by increasing awareness and reach amongst target market, market ability factor, increased website traffic, ability to develop community and relationship with customers (, 2012) and so forth.