Sample on Economic System for IKEA
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Economic systems is an organized method in which nation or state allocate its resources as well as apportions services and goods in the national society. The economic systems of world fall into four categories, i.e. market economy, traditional economy, mixed economy and command economy but there are unlimited difference of each of them. An economic system should define what to manufacture, for whom to produce and how to produce. On the basis of produced commodities and the business environment, some definite economic tactics will be more successful. Besides this, a market is defined as set of sellers and buyers, generally known as agents who with their interaction both potential and real, define set of goods and its prices. Therefore, the market structure concept is understood as those market characteristics that affect the firm’s results and behaviour functioning in that market. Here, the report is inculcating about role of economic system in resources allocation and impact of macroeconomic policies on UK firms including IKEA that designs plus sells ready to use appliances, home accessories, small motor vehicle and furniture. The middle section is illustrating market structure that determine output and pricing decisions of IKEA, markets forces that shape responses of organization and business plus cultural environment that shape the company’s behaviour in the market. Finally, the end of paper is summarizing global factors that shape UK’s business activities.
A government of company follow different economic systems that are introduced normally for effective allocation of resources that are illustrated below:
Free enterprise economy– In such economy type, markets allow mutual beneficial exchange between customers and systems plus process, which based on markets for sorting out economic issues called as market economics. In a liberated economic market, resources are apportioned by the communication of self-governing and free market forces (Tepelus, 2005). It refers that producers define how to manufacture, customers define what to produce and on the customers purchasing power it depends who will get the end products. Here, the market economies work by facilitating shortest interface between producers and customers those are following their personal interest. The self-interest lies at the centre of free market economies (Austin, 2002).
Planned or command economy–An appropriate solution to one big economic issue is scarce resources allocation or appointment of any agency by government. The particular procedure is defined to vital planning and economies that absolutely utilize this planning are known as command economies. In another terms, here resources are instructed and directed by government to be utilized in specific manners. For instance, they can force citizen to decide the number of hospitals and roads to be built or to pay taxes. There are some benefits the command economies have over free market, specifically in terms of rare resources coordination in the period of crisis, such as natural calamity or war (Cavusgiland et.al., 2014).
Mixed economic system: The term mixed economic system is based on two aspects which is market forces and planning of government. In this type of economy the resources which are allocated in the private sector are allotted on the basis of the type of sector (Fan and Phan, 2007). For example in the grocery sector of UK, all the resources are allocated on the basis of market forces. In country the allocation of resources is based on combining the forces of market and planning of government like in health care industry of UK there is provision for both the sectors that is private and public. In most of the countries of the world, there is mixed economic system and only the difference is of share in balance of economic system (Eising, 2007). One of the example related to difference in balance of economic system is that in Cuba, government allocates the resources in extensive manner and on the other side in Europe, allocations of resources is based on mixed economic system which is based on central planning and forces of market.
Fiscal policy is a decision of government in relation to taxing and spending. If government desires to stimulate in economic growth, it will enhance spending for services and goods. This will ultimately enhance the service and goods demand. As demand goes up, production of furniture should go up at IKEA and it will require to hire more manpower (UK Fiscal Policy, 2015). Due to this, unemployed individuals may have jobs as well as money to spend on service and goods. It will further improve the demand of more production and thus the growth cycle will continue. By this IKEA may get more income or business as individuals have more amount to spend on its furniture’s. Therefore, spending of government tends to accelerate economic development (Edwardsand Rees, 2006).
If government think economy is growing too fast or overheating, than can lessen the overall spending. A decrease in spending of government will reduce total demand in the economy. Due to this, IKEA will need to slow production that means decline in the overall profits, leads to less business investment and hiring. A cut in the spending of government may hurt business of IKEA, as there will be less money in the pockets of people to spend on organization offerings (Scullion and Brewster, 2002). In this case, if IKEA offers its products to government then can take dual hit. Besides this, tax is another side of fiscal policy. Reducing taxes tends to enhance economic growth. At the time of reduction in taxes, the company would have more money to spend on production facilities (Feigenbaum, 2015).
It has been observed by some economists that spending of government and taxes reduction will develop a crowding out impact. In case, government does not have enough revenue to add in spending than they have to borrow capital. Some economists believe that borrowing of government result in high interest rates. Moreover, this high rates discourage IKEA from borrowing money for investment and spending. Also, private investment may be crowed out by spending of government (Gösslingand Upham, 2009).
Changes of interest rates for long term have been influenced by the interest rates for short term, like mortgage rates. Low rates of interest means less business expense and more disposable income with customers. Generally, this combination means high profits for the business. Lower rates of mortgage may spur more purchase of household commodity that can be beneficial for the construction sector (Stucklerand et.al., 2009). Also, less rates leads to more refinancing of current mortgages that can also enable customers to purchase other things. High rates of interest can have opposite influence for IKEA, i.e. less sales, high interest expenses and less profits. Changes in interest rates can influence on the prices of stock that can affect spending of customers (Harrison, 2013).
There following are two main macroeconomic policies that influence on UK organizations including IKEA as well as on worldwide economy:
Competition policy – In competitive economic policies, price are reduced. Competition encourages UK organizations to enhance their products and services quality for attracting more customers towards their offerings plus increase overall market share. According to this policy, companies make their commodities that provide a balance between quality and price to customers. Moreover, to produce and offer best products, organizations are required to be innovative in their plan, product models, services, manufacturer products, etc. for beating their challengers in global markets (KANAGASABAPATHY, 2011).
Regulation policy –Economic strategy and regulation is to examine the influence on performance of business and contribute both to economic performance development and decrease in poverty. UK government enforce regulations for forecasting the way in which market works plus outcomes that lead to several consequences for both manufacturers and customers. Some regulations imposed by government of countries around the globe on their business organizations are standard services to customers, fair trading, and environment policies and so on. For regulating the corporations of UK, a regulatory committee has been developed to ensure best services to customers, monitor prices, and open up markets and surrogates rivals (Manuel, 2015).
A very significant role is played by market structure in defining business output and pricing decisions. There are distinct types of market structures like monopoly, perfect competition and oligopoly. In the perfect competition there are many producers and customers and each company has some contribution in the overall market share (Samy, Odemilinand Bampton, 2010). Hence, companies don’t have complete control on market output and price. Also, the main characteristics of such markets is product differentiation. On the other hand, the industry is dominated by some firms in oligopoly market structure which together control most of the market share by controlling number of final outcomes and product price in the determination of market. Other than this, in the monopoly market structure only one buyer determine supply and power (Nordhaus, 2009).
In UK, IKEA play dominating role in furnishing industry of country as it is one of the major manufacturer organization which deals in the market structure of oligopoly and this includes features such as:
Organizations operating in oligopoly market set the prices as in UK, IKEA has set the lower prices of its furnishing products which creates threats for new entrants to offer the products at competitive prices. Company has very greater influence in the market as they take the advantage of pricing leadership as they have benefit of manufacturing the products at low cost (Fan and Phan, 2007). These factors also ultimately help them to maintain there greater market share in the industry.
Marketers should understand the crucial relationship between price and demand for the product in these type of market where the costs factor determines the lower limit of prices, and the demand factor would set the upper limit. The higher the demand for the product, IKEA may charge higher prices to make additional profits however in lower demand, the prices should be set as competitively lower. Also because of fewer number of sellers they would likely to follow these price changes to compete. So price changes of IKEA would affect the demand hugely because rising prices may shift customer’s preference towards substitute cheaper brands (Pendleton, 2001).
The IKEA responses are affected by market forces in different ways and this includes supply, demand, price and marketing to customers. The number of final output delivered in the market defines the Supply. The term demand is referred to number of items in-house appliances and furniture’s required in the market. For instance, a new set of home appliance can be positioned into the market. This new set supply is more than its actual demand and hence demand and supply have an inverse relation. IKEA always try to reach at an equilibrium point where demand and supply are equal. The particular point is considered as idea in the market. Also, this demand and supply are measured by price (Wise, 2000).
Moreover, the activities of marketing can adjust the point of equilibrium in demand and supply. The process of marketing can enhance IKEA products demand, thereby shift the equilibrium, where demand plus supply meet the needs of customers. In general terms, market forces are referred to supply and demand forces affecting the overall quantity and price of commodities. Besides this, the market forces would influence the price and IKE will work for ensuring there is advantage in such effects (Miles, 2005). For example, if a product demand is more than the company would decide to enhance their price in line with prevailing demand, ultimately by improving the price equilibrium. In this case, the assumption is that supply is continuous. In opposite case, when supply increases then the company would need to lessen their price for increasing or maintaining their revenues as well as guarantee profitability, here the demand assumed remains constant. Therefore, the market forces affect responses of IKEA in relation to pricing, production, profitability, competition plus their promotion activities among other variables of business (Woll, 2008).
At present, most of the organizations are following globalization trend. In order to gain market share by entering into new nations, specifically Asia, the business and corporate strategies define its competitive edge and sustainability among future challengers. For instance, the globalization strategy of IKEA in China comprise localization, pricing strategies and joint venture (Hunter, 2006). Firstly, the joint venture of IKEA with local firms in China, influence by one macro environmental impact, i.e. Chinese government political policy to archive mutual benefits and principal of equality. Second, the company adopts localization strategy to suit with the culture of China, for instance, IKEA offer section of balcony, as many Chinese prefer to stay in apartments. At last, the strategy of pricing allow IKEA to make competition against its challengers, for example the organization cut cost for some of its products like single-scat Ektorp armchair below the standard rates that is cheaper in comparison to price on which it sell in US. The company’s distinctive corporate and business level strategy have allowed it to attain impressive growth (Worthington and Britton, 2009).
Additionally, IKEA outsource 90 percent of its commodities and remaining 10 percent are produce internally. The following benefits are attained by IKEA due to outsourcing:
Low cost structure – Vertical integration has cut the cost structure of organization, as it develops increasing scale of economies. Attaining economies of scale is very essential for IKEA because it follow a structure of fixed cost. The industry allows company to spread its fixed cost over large production volume and in this manner it drove down the business to per unit average cost (Humphries, 2004).
Focus on main business – One more benefit of IKEA’s strategic outsourcing is that it facilitates the managers to concentrate their resources on performing core actions, which have most possibilities of developing competitive edge and value (Wynne, 2012).
The exchange of goods, services and capital between the different countries refers to the International Trade. UK business organizations like IKEA have several advantages from international trade such as optimum utilization of resources, greater economies of scale, and export products to countries where demands are higher. Importance of international trade can be explained with the comparative advantage that IKEA would be having in mutually beneficial ways. For example, they have core competence to produce goods at low cost, the cost advantage gives them higher advantage while engaging in international trade (Aguilera and et.al., 2007).
International trade for IKEA has importance because as per global expansion strategy it widens the market opportunity and increases the sales volume so as growth in profit. Further, the significance for IKEA to go international lies in the fact that the local Swedish furniture market for the company had become very saturated (Ferner, Almondand Colling, 2005). Therefore, it is implied that international trade would be beneficial to IKEA, UK business organisation to expand their market share while taking full advantage of their competitive abilities. Plus, export will increase sales volume and profits for organizations. Moreover, it help them to reduce dependencies on single geographical market thus improves economies of scale and greater opportunities even when trying to expand the product portfolio in a saturated local market. One more advantage of international trade is to cope up with seasonal business trend by focusing on other market when there is off-season in the local market (Bowen, 2002).
IKEA has a unique advantage of having global expansion strategy that one design suits all. The competence of design quality aids them to enter different markets across the world. Moreover, with 1200 products in home furnishing industry they have something to offer for every part of the world. So, the significance of international trade for IKEA has flourished as the company has become Multinational Company operating in different countries in EU and worldwide. The companies in UK, due to international trade can outsource some of their business operations in other nations for enhancing quality and reducing cost and add in accelerating country’s economic growth (Button, 2009).
IKEA’s business is subject to various global factors as the organization is operating in the global settings. Two of the major global factors impacting UK business organization IKEA are analysed below:
Prices and costs: Cost effectiveness leads to lower prices which is the major factor that need to be considered while operating in global environment. Lower prices is the core competence of IKEA’s global strategy and helps them to grow in the highly competitive international house furnishing market. With extensive research in compact designs they were able to cut prices significantly to attract their target customer segment consists of young low-to-middle income families (Christmann, 2004). Their distinct ability to acquire and maintain long-term relationship with suppliers aids them to purchase low-priced materials coupled with continuous innovation helps them to get alternative available low cost materials without compromising on quality. Cost savings while manufacturing furniture should consider various factors such as meeting strict requirements to be functional, inventory management, quality, and most importantly keeping in view global environment the impact on the environment. With the business operations expanded in 50+ countries finding the right manufacturer is also a challenge that need to be taken care of while focusing on cost effective production (Driscolland Starik, 2004).
Meeting local expectations: To establish the market share in new geographic location puts immense challenge of formulating strategies for effective market segmentation and product differentiation according to understanding of the local culture and local consumer preference. Additionally, suppliers and manufacturers would also require to have scope of customization for better taping the local markets. One more factor in the category that IKEA had to deal with the local taxation and exchange rates. Further, products are required to have been redesigned with considering local customers preferences and tastes (Dunn, 2002).
Policies are standardized procedures to monitor business operations and outcomes. European Union assumes policy making and enforcement on UK business organizations by establishing procedures. Policies are designed for the cause of minimizing harmful effect and to pursue for positive benefits. The two policies which have major impact on UK business organizations IKEA are analysed below:
Employment Policy: European Unions have strong policies in pursuit of encouraging employment rates for the organizations operating across European countries. For example, the UK government is keen to stimulate business efficiency of UK business organizations like IKEA to be well competitive in global markets and create job opportunities. EU policies also force the companies to offer people the opportunity to develop their skills by training and experience opportunities for stable employment (Eising, 2007).
Inflation Policy: The government and EU tries to minimize events of sudden rising in prices by enforcing inflation control policies. For determining the interest rates, Monetary Policy Committee (MPC) of the Bank of England is responsible. Interest rates are the means to provide control on people borrowing and spending by regulating prices up or down as per the need of situations. Consumers and businesses find it more expensive to borrow money when interest rates rises and have to spend less, which results in downturn of the prices. However for Government point of view policy decision to raise taxes results in increasing tax revenues (Fan and Phan, 2007).
The above report concludes that a business entity works in an environment which is affected by competitors, government, international factors, suppliers and customers. Some influences are direct on business environment and are clearer, for instance impact of tax and competition policy on IKEA. Other impacts are indirect that comes from global arena that influence the national business environment. Moreover, the paper is summarizing that a company functions within the business environment and have to define strategies, like localization, pricing, outsourcing, joint venture, etc. which helps them to meet their business objectives in a manner which comply with the relevant regulatory and legal frameworks. Additionally, the overall market of business takes several forms like there may be extensive perfect completion, monopoly or oligopoly structure that shape the behaviour of organization in a manner it operates.
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