Topic 2B – Overview

Micro-analysis

Learning Objectives
 Link and evaluate the effect of external forces on a company’s internal environment 

 Apply different tools for making meaningful comparisons to assess a firm’s internal
 environment 
  Design a company internal analysis report 
 Analyse the importance of internal analysis for multinational and global firms 

Introduction
In an interesting article in The Guardian Newspaper, titled How to win new business for your
company, Richard Butterfield (Relationship Director at Lloyds TSB) says that if entrepreneurs
want their companies to have a future, they need to create a strategy for it.

1
But to build a winning team, it is necessary to keep evaluating the internal capabilities and
weaknesses of your company, always in relation to the external environment’s opportunities,
competition and threats. More specifically, he suggests that entrepreneurs that find the time to
step back from their daily operations and assess their strategy for gaining new business are often
the ones who win the battle. "Business owners need to spend some time out of the business,
working on it, carefully considering how well it is doing and where it can improve," he says (
http://www.guardian.co.uk/small-business-network-partner-zone-lloyds-tsb/how-to-win-new-
business?INTCMP=SRCH, accessed 20/01/2013). "Performing some SWOT analysis (strengths,
weaknesses, opportunities and threats) can be highly enlightening and will help you find new
ideas and methods that can move your company move forward." SWOT Analysis, as well as the
Value Chain Analysis and the Benchmarking, are the tools we will be discussing in Topic 4.

Main Analysis
SWOT Analysis
To begin with, a useful tool for conducting an internal analysis to our company is the so called
SWOT Analysis.

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SWOT is an acronym for the internal Strengths and Weaknesses of a firm and the environmental
Opportunities and Threats facing that firm. SWOT analysis is a historically popular technique
through which managers create a quick overview of a company’s strategic situation. Before you
proceed to the following analysis, please watch this video, explaining the use and importance of
SWOT analysis (to watch the video please copy and paste this link to your web browser:
http://www.youtube.com/watch?v=CDueS81iVG4).

Moreover, as it is explained in the video, SWOT analysis enables to examine our environment in
terms of Strengths and Weaknesses (internally) and Opportunities and Threats (externally).
Based on this approach, we explain in more depth the different elements of a SWOT analysis:

Opportunities

Features of the external environments within which the enterprise operates may present
opportunities of which the organization may be able to take advantage. Some examples could
include:
 The removal of barriers to international trade, allowing greater access to markets. 

 Legislation harmonization - products or services from one country may now be saleable
across the whole of the free trade zone. 

 The economic development of countries in different economic blocks e.g. China. 

 The emergence of wealthy “grey” population cohorts aged 50 years and over who have
significant personal disposable income (no longer having any children to support!). This
income may be spent on expensive cars, second homes, or international travel (etc). 

Threats

According to Morden (2007:104), ‘features within the external environment may instead present
some kind of threat to the continued operation of a particular activity. Worse, they may pose a

3
threat to the continued existence of the enterprise itself’. Some indicative examples could
include:

 ‘Demographic trends moving against the traditional customer base of the enterprise. For
instance, the low birth rates in Western Europe have reduced demand for products
associated with the feeding, clothing, and care of babies and young children. 

 Changing social or cultural factors moving against the pattern upon which the existing
business of the enterprise is based. The wearing of animal fur is widely perceived in the 

UK to be “politically incorrect”. Fewer people in the UK eat red meat. 

 Global recession or restraint on trade. 

 Political uncertainty and acts of terrorism, caused for instance by conflicts in the Middle
East or by tension between different ethnic or religious groups. 

 Free trade developments likely to encourage powerful new entrants into a market. 

 Free trade zones encouraging manufacturers to move to low-cost manufacturing locations
such as Mexico, Indonesia, Vietnam or Poland’. 

Strengths and Weakness

Another two important components of the SWOT are the Strengths and Weaknesses. Morden
(2007: 28-29), in his book Principles of Strategic Management presents a number of valuable
examples:

 ‘Can the organization actually do what it wants to do with the resources and assets
available or accessible to it? 

 Ownership structure and the processes of strategy formulation. Who owns the enterprise?
Who makes the decisions? What do they want? 

 The possession of special skills; and distinctive or core competences. Rolls Royce is, for
example, known for making aircraft engines of a very high quality and reliability. 

 The character of the knowledge base. What does the enterprise know? Kodak and Canon
for instance probably know more about imaging technology and the imaging business
than anyone else. 

 Quality of entrepreneurship (or “intrapreneurship”) within the organization. Are staff
encouraged to do things in new ways, or to search for new lines of business? Or are they 
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 instead discouraged by senior managers from “thinking for themselves”, and from being
creative or innovative in their work?

 The quality and character of risk management. Can the enterprise manage the risk
associated with its business? Does it take on risky projects from which it can learn or
develop competitive advantage; or does it instead avoid such projects? For example,
starting a new airline is considered highly risky. Richard Branson (successfully) decided
to take the risk of establishing Virgin Atlantic even though he knew the new airline
would have to compete with well-established and aggressive competitors like British
Airways and American Airlines. 

 The possession of specific unique selling propositions or product USPs. Daimler-
Chrysler and BMW, for instance, have created ranges of prestige high-performance cars
that have come to dominate the car markets of many countries. 

 The offer of quality, reliability, service and value for money (QRSV). The reliability and
value for money characteristics of for instance Seiko brand watches has put their
manufacturer into a dominant global position in the watch market. 

 Operational scale or “critical mass”. Operational viability is often dependent upon the
achievement of a minimum operational size, for example for reasons of economies of
scale; or a heavy burden of fixed, overhead, or research and development (R&D) cost.
This is the case for instance in healthcare and the automotive sectors. 

 The capacity to develop and manage international or global activities. Does the enterprise
have the resources and the skills to operate on a global scale; and does it possess cross-
cultural capabilities (that is, can people from different cultures work together to achieve
company objectives)’? 

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The Value Chain Analysis (VCA)
Another tool to internal analysis that emerged to add more rigor and depth in the identification of
competitive advantage around which a firm might build a successful strategy is value chain
analysis. Before you proceed to reading the following, please spend 7 minutes watching the
following Video on Value Chain Analysis (VCA):

To watch the Video, please copy and paste the following link into your internet browser:
http://www.youtube.com/watch?v=7wL6x1BSlw8.

Moreover, in line with the video’s content, Value Chain Analysis describes the activities that
take place in a business and relates them to an analysis of the competitive strength of the
business, or if you want, to the outputs that customers value. According to Pearce and Robinson
(2007), customer value derives from three basic sources: activities that differentiate the product,
activities that lower its cost, and activities that meet the customers’ need quickly. Following this

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line of thought, Value Chain Analysis (VCA) attempts to understand how a business creates
customer value by examining the contributions of different activities to that value. The activities
of a business could be grouped under two headings:

(1) Primary Activities - those that are directly concerned with creating and delivering a product
(e.g. component assembly); and

(2) Support Activities, which whilst they are not directly involved in production, may increase
effectiveness or efficiency (e.g. human resource management). It is rare for a business to
undertake all primary and support activities.
Value Chain Analysis is one way of identifying which activities are best undertaken by a
business and which are best provided by others ("out sourced").

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Linking Value Chain Analysis to Competitive Advantage

What activities a business undertakes is directly linked to achieving competitive advantage. For
example, a business which wishes to outperform its competitors through differentiating itself
through higher quality will have to perform its value chain activities better than the opposition.
By contrast, a strategy based on seeking cost leadership will require a reduction in the costs
associated with the value chain activities, or a reduction in the total amount of resources used.

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Moreover, the exhibit above shows a typical value chain framework. It divides activities within
the firm into two broad categories as mentioned above: primary activities and support activities.
The value chain includes a profit margin because a markup above the cost of providing a firm’s
value-adding activities is normally part of the price paid by the buyer – creating value that
exceeds the cost so as to generate a return for the effort. However, judgment is required across
individual firms and different industries because what may be seen as a support activity in one
firm or industry may be a primary activity in another. Computer operations might typically be
seen as infrastructure support, for example, but may be seen as a primary support activity in
airlines, newspapers or banks.

At this point, you may also find useful watching the following video explaining the role of Value
Chain for achieving competitive advantage. Please copy and paste this link in your web browser:
http://www.youtube.com/watch?v=mu9TWlcjNKk.

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Steps in Value Chain Analysis

Value chain analysis can be broken down into a three sequential steps:

(1) Break down a market/organisation into its key activities under each of the
major headings in the model;

(2) Assess the potential for adding value via cost advantage or differentiation, or
identify current activities where a business appears to be at a competitive disadvantage;

(3) Determine strategies built around focusing on activities where competitive advantage
can be sustained.

Think Theory …
How is VCA different from SWOT analysis?

Internal Analysis and the Global Environment

The use of the concept of globalisation is quite common these days in our everyday life. But
what exactly is globalisation? ‘Globalization refers to the strategy of approaching worldwide
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markets with standardized products’. Global corporations use their worldwide experience to
compete in global markets. Specifically, Global Corporations are entities headquartered in one
country with subsidiaries in other countries. Awareness of the strategic opportunities faced by
global corporations and of the threats posed to them is important to planners in almost every
domestic industry. Understanding the nuances of competing in global markets is rapidly
becoming a required competence of strategic managers (e.g. advertising in foreign countries).

Interestingly, for corporations like Citicorp (the world's largest financial services network, 140
countries,16,000 offices worldwide), Coca Cola (in more than 200 countries), Exxon Mobil,
Gillette, IBM and hundreds of others, more than 50% of their annual profit is coming from
abroad.

According to Pearce and Robinson (2007:121), the evolution of a global corporation often entails
progressively involved strategy levels. For instance, the first level often entails minimal effect on
the existing management orientation or on existing product lines. The second level involves
foreign licensing and technology transfer requires little change in management or operation. The
third level typically is characterized by direct investment in overseas operations, including
manufacturing plants (including the development of global management skills). The fourth level
is characterized by a substantial increase in foreign investment, with foreign assets comprising a
significant portion of total assets. At this level, the firm begins to emerge as a global enterprise
with global approaches to production, sales, finance, and control.

Also, based on an analysis of the macro-environment and micro- environment, a multinational

corporation typically displays one of four orientations towards their overseas activities:

1. An ethnocentric orientation believes that the values and priorities of the parent
organization should guide the strategic decision making of all its operations.

2. A polycentric orientation means the culture of the country in which a strategy is to

be implemented is allowed to dominate the decision-making process.

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 3. A regiocentric orientation exists when the parent attempts to blend its own
predispositions with those of the region under consideration, thereby arriving at a
region-sensitive compromise.

4. A corporation with a geocentric orientation adopts a global systems approach to

strategic decision making, thereby emphasizing global integration.

Moreover, an interesting example of a global firm that constantly examines its internal
environment in relation to the macro-environment is FedEx.

FedEx Corporation ("FedEx") is the world's largest provider of transportation, e-commerce and
supply chain management services. Operations began April 1973. Headquarters in Memphis,
Hong Kong, Toronto, Ontario, Brussels, Miami, more than 150 000 employees worldwide. The
company revenue in 2002 was $15 billion U.S. dollars. FedEx serves 366 airports in 214
countries with a total fleet of 648 aircrafts. The average package volume per day is more than 3.2
million. In the case of FedEx, the value chain model highlights specific activities in the business
where competitive strategies can be best applied. The model views the firm as a series or "chain"
of basic activities that add a margin of value to a firm’s products or services.
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FedEx is in the Air Freight or Air Cargo Transportation Industry. FedEx have been revamping
the logistics strategies in order to integrate the elements of the supply chain into their system, i.e.
those of vendors and customers. Integrated logistics management allowed firm to closely co-
ordinate operations related to purchasing, transportation, inventory and warehousing; thus
yielding significant cost savings, and also increasing service and performance levels. FedEx is
provider of 'outsourcing' components like just-in-time transportation and delivery for the other
companies. In addition to the physical resources that FedEx normally possessed (like planes and
trucks), corporation also became an expert in another key resource: information technology.

This industry is in the early maturity life cycle because entry is difficult, yet current competitors
are still growing. Companies can realize economies of scale in this industry in marketing and
purchasing. Services in this industry are essentially identical, with the exception being the value-
added services. FedEx inbound logistics include researching the cost of transportation (including
duties and tariffs) involved in establishing new distribution centers (& collecting the packages).
Operations include establishing supply-chain management with integrated warehousing,
logistics, and less-than-truckload (LTL) services into suite of services for the package delivery.
Outbound Logistics include determining the route, which the package is sent; Define and
establishing the distribution system; Preparing air traffic forecast; Sales and marketing include
providing ordering service by telephone or by the Internet; Establishing new distribution
channels; Establishing new contracts with vendors, airlines, oil suppliers and truck manufactures;
and establishing brand name and company image. In terms of services, FedEx’s worldwide
package tracking system and technical support is available 24 hours a day on the Internet.

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Benchmarking

Another tool for examining the company internal environment in relation to competition is the
Benchmarking. Benchmarking can be used as a way of understanding how an organisation’s
strategic capability, in terms of internal processes, compare with those of other organisations.

According to Xerox Corporation, the company that pioneered this concept in the United States,
benchmarking is “the continual process of measuring products, services, and practices against
the toughest competitors or those companies recognized as industry leaders.” Benchmarking,
is based on the concept that it makes no sense to reinvent something that someone else is already
using. It involves openly learning how others do something better than one’s own company so
that the company not only can imitate, but perhaps even improve on its techniques. According to
Wheelen and Hunger (2012: 344), the benchmarking process usually involves the following
steps:

1. Identify the area or process to be examined. It should be an activity that has the potential to
determine a business unit’s competitive advantage.
2. Find behavioral and output measures of the area or process and obtain measurements.
3. Select an accessible set of competitors and best-in-class companies against which to
benchmark. These may very often be companies that are in completely different industries, but
perform similar activities. For example, when Xerox wanted to improve its order fulfilment, it
went to L. L. Bean, the successful mail order firm, to learn how it achieved excellence in this
area.
4. Calculate the differences among the company’s performance measurements and those of the
best-in-class and determine why the differences exist.
5. Develop tactical programs for closing performance gaps.
6. Implement the programs and then compare the resulting new measurements with those of the
best-in-class companies.

According to our Johnson et al (2009:79), there are different approaches to benchmarking,

including the Historical Benchmarking; the Industry sector Benchmarking; and the best-in-class
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 Further Reading
Case Study
SWOT Analysis – IKEA

INTRODUCTION

IKEA is an internationally known home furnishing retailer. It has grown rapidly since it was
founded in 1943. Today it is the world's largest furniture retailer, recognised for its Scandinavian
style. The majority of IKEA's furniture is flat-pack, ready to be assembled by the consumer. This
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allows a reduction in costs and packaging. IKEA carries a range of 9,500 products, including
home furniture and accessories. This wide range is available in all IKEA stores and customers
can order much of the range online through IKEA's website. There are 18 stores in the UK to
date, the first of which opened in Warrington in 1987. In July 2009 IKEA opened a store in
Dublin too - its first in Ireland.

IKEA - Patterns for Progress

IKEA stores include restaurants and cafés serving typical Swedish food. They also have small
food shops selling Swedish groceries, everything from the famous meatballs to jam. Stores are
located worldwide. In August 2008 the IKEA group had 253 stores in 24 countries, with a further
32 stores owned and run by franchisees. It welcomed a total of 565 million visitors to the stores
during the year and a further 450 million visits were made to the IKEA website. IKEA sales
reached 21.2 billion Euros in 2008 showing an increase of 7%. The biggest sales countries are
Germany, USA, France, UK and Sweden. In 2008 IKEA opened 21 new stores in 11 countries
and expects to open around 20 more in 2009 as part of its strategy for growth.

Low prices are one of the cornerstones of the IKEA concept and help to make customers want to
buy from IKEA. This low price strategy is coupled with a wide range of well designed,
functional products. IKEA's products cater for every lifestyle and life stage of its customers, who
come from all age groups and types of households. This is vital in times when the retail sector is
depressed, as it increases IKEA's potential market.

Since it was founded IKEA has always had concern for people and the environment. The IKEA
vision 'to create a better everyday life for the many people' puts this concern at the heart of the
business. IKEA has responded to the public’s rising concern for sustainability in its choice of
product range, suppliers, stores and communication. It has also spotted business potential in
providing sustainable solutions. IKEA's concern for people and the environment encourages it to
16
make better use of both raw materials and energy. This keeps costs down and helps the company
to reach its green targets and have an overall positive impact on the environment.

This case study will show why IKEA believes a strong environmental stance is good business
practice.

2. SWOT analysis

IKEA's goals of sustainability and environmental design are central to its business strategy. It has
launched a new sustainability plan to take the company through to 2015. This will combine
social, environmental and economic issues.

IKEA uses SWOT analysis to help it reach its objectives. This is a strategic planning tool. It
helps the business to focus on key issues. SWOT is the first stage of planning and looks at the
Strengths, Weaknesses, Opportunities and Threats involved in a project or business venture.

Strengths and weaknesses are internal aspects. This means that they are within the control of the
business. They may refer to aspects of marketing, finance, manufacturing or organisation.
Opportunities and threats are external factors. This means that they are outside the control of the
business. These may include the environment, the economic situation, social changes or
technological advances, such as the internet.

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A business can create opportunities and counter threats by making the most of its strengths and
addressing its weaknesses. For example, one of IKEA's key strengths is its strategic aim to use
no more material than necessary in the production of each item. In addition, it develops its
product plans to increase its use of waste or recycled materials.

 One particular table, the NORDEN table, uses knotty birch wood. The knots in this wood
usually mean it is rejected by other retailers and manufacturers as unsuitable for use.

However, IKEA has made the knots part of its design feature. 
 OGLA chairs are made using wood waste from saw mills and LACK tables use a
'sandwich' of stiff card between wood sheets to reduce the amount of solid wood needed. 





3. Strengths

Strengths could include a company's specialist marketing expertise or its location. They are any
aspect of the business that adds value to its product or service. IKEA's strengths include:

 a strong global brand which attracts key consumer groups. It promises the same quality
 and range worldwide 

 its vision – 'to create a better everyday life for many people' 
 a strong concept – based on offering a wide range of well designed, functional products at
 low prices 
 a 'democratic design' – reaching an ideal balance between function, quality, design and
price. IKEA's 'Cost Consciousness' means that low prices are taken into account when
each product is designed from the outset. 

These strengths contribute to IKEA being able to attract and retain its customers.

One way IKEA measures its strengths is the use of Key Performance Indicators (KPI). KPIs help
IKEA to assess the progress of its vision and long-term goals by setting targets and monitoring
progress towards these. An example of one of IKEA's KPIs is the percentage of suppliers that are
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currently IWAY approved. The IWAY is the IKEA Way of Purchasing Home Furnishing
Products. This guideline defines the social and environmental requirements IKEA expects of its
suppliers.

IKEA has strengths right through its production processes:

 Increasing use of renewable materials – IKEA improved its overall use from 71% in 2007
 to 75% in 2009. 
 'Smarter' use of raw materials – IKEA increased the use of recycled or reclaimed waste
 products in energy production across all stores from 84% in 2007 to 90% in 2009. 
 Volume commitments – IKEA believes in creating long-term partnerships with its
suppliers in order to achieve this. By committing to buying large volumes over a number
of years IKEA can negotiate lower prices. This also benefits the suppliers because they
 enjoy the greater security of having guaranteed orders. 
 Economies of scale – for instance, bulk buying at cheaper unit costs. 
 Sourcing materials close to the supply chain to reduce transport costs. 

 Delivering products directly from the supplier to IKEA stores. This slashes handling
 costs, reduces road miles and lowers the carbon footprint. 
 Using new technologies – for example, IKEA's OGLA chair has been in its range since
1980. The chair has changed through the years to reduce the amount of raw materials
needed. 


4. Opportunities

A business uses its strengths to take advantage of the opportunities that arise. IKEA believes that
its environmentally focused business conduct will result in good returns even in a price sensitive
market. As the company states:

'There is a true business potential for IKEA in providing solutions that enable customers to live a
more sustainable life at home. IKEA is developing effective solutions for customers in order to
support them recycling or reusing used products, aiming at no products ending up at landfill and
the recycled materials used in producing new IKEA products.'

Some of the opportunities that IKEA takes advantage of through its sustainability agenda are:

 a growing demand for greener products 


 a growing demand for low priced products. Trends in the current financial climate may
 result in consumers trading down from more expensive stores 
 demand for reduced water usage and lower carbon footprints. 

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IKEA has a number of areas of focus to its work with sustainability, each of which it supports in
various ways:

1. Solutions for a sustainable life at home – IKEA gives online tips and ideas for this.
2. Sustainable use of resources. IKEA aims for zero waste to landfill, wastewater treatment
and programmes to reduce its use of water.
3. Reducing carbon footprint. IKEA aims to reduce energy use, use more renewable energy,
cut its use of air transport and reduce packaging. Its green transport initiative includes an
aim to reduce business flights by 20% in 2010 and 60% by 2015.
4. Developing social responsibility. IKEA's policy includes support for charities such as the
World Wildlife Fund, UNICEF and Save the Children.
5. Being open with all its stakeholders. This involves building trust through good
communication with consumers, co-workers, key opinion formers and the press. Being
sustainable is a central part of IKEA's image.

5. Weaknesses and threats

Weaknesses

IKEA has to acknowledge its weaknesses in order to improve and manage them. This can play a
key role in helping it to set objectives and develop new strategies. IKEA's weaknesses may
include:

 The size and scale of its global business. This could make it hard to control standards and
quality. Some countries where IKEA products are made do not implement the legislation
to control working conditions. This could represent a weak link in IKEA's supply chain,
affecting consumer views of IKEA's products. The IWAY code is backed up by training
and inspectors visiting factories to make sure that suppliers meet its requirements. 

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  The need for low cost products. This needs to be balanced against producing good
quality. IKEA also needs to differentiate itself and its products from competitors. IKEA
believes there is no compromise between being able to offer good quality products and

low prices. 
 IKEA needs to keep good communication with its consumers and other stakeholders
about its environmental activities. The scale of the business makes this a difficult task.
IKEA produces publications in print and online (for example 'People and the
Environment') and carries out major TV and radio campaigns to enable the business to
communicate with different target audiences. 

Threats

If a company is aware of possible external threats, it can plan to counteract them. By generating
new ideas, IKEA can use a particular strength to defend against threats in the market. Threats to
IKEA may stem from:

 social trends – such as the slowdown in first time buyers entering the housing market.
 This is a core market segment for IKEA products 
 market forces – more competitors entering the low price household and furnishings
 markets. IKEA needs to reinforce its unique qualities to compete with these 
 economic factors – the recession slows down consumer spending and disposable income
reduces. 

IKEA addresses these issues in many ways. It manages weaknesses and threats to create a
positive outcome.

Social trends: IKEA is building online help to guide customers to a more sustainable life. Here it
can focus on home improvement in the slowing housing market. It supports customers with tips
and ideas on its website to reduce their impact on the environment. This will also save them
money. Staff are trained on sustainability, both on what IKEA is doing and how they can take
responsibility to become sustainable for themselves.

Market forces: IKEA is large enough to enjoy economies of scale. This lowers average costs in
the long run through, for example, better use of technology or employing specialized managers.
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Economies of scale also give a business a competitive edge if cost savings are then passed on to
customers in the form of lower prices. This puts up high barriers to entry for smaller companies
entering the market.

Economic factors: IKEA's low prices create appeal amongst its customers in tough financial
times. It is vital to keep prices as low as possible when the retail sector is depressed. IKEA's
pricing strategy targets consumers with limited financial resources. Its products will also appeal
to those with higher budgets through good quality and design. The company must ensure that it
is always recognised as having the lowest prices on the market in the future. Communication
plays an important role here.

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