IKEA India Entry Strategy Essay
IKEA India Entry Strategy
IKEA originated in 1943 by a 17 year old Ingvar Kamprad using his entrepreneurial skills selling items out of a catalog and continued to expand where his stores is located in more than 30 countries currently. IKEA sells furniture and other household products at a very low price so that everyone can afford them. IKEA is always looking to save money on their packaging, costs, and any other opportunity they get to save money. As a team we thought it would be most beneficial for IKEA to enter into India specifically Mumbai, India. India is one of the most emerging countries and gives IKEA a great opportunity. As a team we feel IKEA should implement interior designers that help people decide which furniture properly fits in their house hold. The interior designer will be extremely knowledgeable and accommodating when helping people decorate their homes.
India is an emerging country with one of the largest democracies in the world. India has one of the largest populations in the World which is a great opportunity for IKEA. One problem with the huge population is the wide array of income ranging from the very wealthy all the way down to the lower class who may work for as little as a dollar a day. The furniture industry in India only consists of .05% of its GDP which is another reason IKEA has a great opportunity to be successful in India. India has a large opportunity for FDI (foreign direct investment) because of the current economic conditions and the rapid growth rate of the country in terms of GPD and other economic indicators.
IKEA in India will maintain the original Swedish logo and plans to target people in India in the lower middle class and above. It is estimated that there are between 30 and 300 million people that would fit into IKEA’s target market. IKEA plans to start as one store in Mumbai and expand depending on sales and revenue. IKEA will need to have managers who are experienced help with the opening procedure to ensure that everything is done right. It is essential for IKEA to hire Indian managers and retail workers as they will be able to make a connection to the guests that foreigners might not be able to make. People of India understand how life works, what people want, and how they do business. IKEA will need to cover all aspects of business in terms of employment from sales people all the way up to top management and everything in between.
IKEA must promote and market their opening properly so that people are aware of the store location and what it has to offer. Advertising and promotion is very important for them and utilizing social media could be a large attribute to their marketing campaign. IKEA is going to issue common stock and other aspects of business to ensure that they can afford the transition into India. There are many challenges that IKEA may face in this process, but through careful analysis and marketing research they can overcome any adversity that may come their way.
IKEA was established in 1943 where 17 year old Ingvar Kamprad started a local catalog selling household goods with money that his father had given him. Kamprad ran a very successful business and decided to open selling furniture at a low price. Kamprad established a name for himself becoming very reliable, dependable, and offering a good product at a low price. In 1965, one of the biggest stores was opened where people of Sweden lined up outside the doors waiting for the store to open. Kamprad ran a very successful business expanding globally and penetrated the market in the United States in Pennsylvania in 1985.
IKEA is considered to be one of the World’s top furniture retailers generating more than $12 million in profit in 2002. IKEA sells furniture and other miscellaneous products at a very low price allowing numerous people to purchase their products. IKEA sets an initial benchmark in regards to the pricing and then cut the prices by more than 20-50% to ensure guests of all social classes can purchase there items. IKEA understands that only allowing the upper class to purchase their product eliminates a large amount of potential customers. IKEA also tries to attract to college students who are on a tight budget, but need to purchase furniture for dorm rooms or apartments. IKEA’s mission statement is:
“The IKEA Concept is based on offering a wide range of well designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them. Rather than selling expensive home furnishings that only a few can buy, the IKEA Concept makes it possible to serve the many by providing low-priced products that contribute to helping more people live a better life at home.”
IKEA will continue to sell their products at a low price as long as people continue to assemble their own products. A huge difference between IKEA and other leading furniture retailers is that IKEA does not assemble products for their customers which keep their costs low. IKEA is very price conscious and always trying to keep costs down. An example of keeping costs low is the flat boxes they use for their products which minimize shipment costs and also production costs. IKEA managers have been trained to make employees aware of exceeding costs that are harmful to the company such as shutting lights or computers off that are not in use.
IKEA currently operates in 42 different countries all over the world, selling products at low affordable prices for everyone. When IKEA began going international they ran into some problems as they did not do marketing research to learn about what the customer wants. An example is in Philadelphia, USA where customers complained about furniture not fitting with the American lifestyle. IKEA scrambled to gather information to regain their position in the international market. IKEA learned a lot of lessons about entering internationally realizing there are many changes that need to occur to succeed internationally. After this mishap in the United States, IKEA developed a marketing research team which has led to their success in the other countries around the world that they entered.
IKEA maps there stores out properly to ensure that people spend money while there. They often have furniture at the beginning of the store with a pathway leading customers throughout the store to see everything. If a customer wants to purchase a particular item they write down the code and give it to the workers in the warehouse. At the end of the journey throughout the store customers also will be given the opportunity to purchase smaller items such as pens, pencils, paper, and other miscellaneous products affiliated with furniture or household goods. This is a beneficial marketing and strategic planning for IKEA to maximize their profits by the layout of their stores.
INDIA – COUNTRY ANALYSIS
India is the world’s largest democracy and is the second most populous country. It is one of the most diverse nations with numerous cultures, religions and languages. It is taking long strides with a progressive pace in terms of highly improved rate of literacy, health and life expectancy and majority of its citizens have been less affected by poverty, when compared to the past.
In the past decade, India has turned out to be a major player in the economic arena. For a while now, it has been growing at a rate of around 8% and is the second fastest growing nation, second only to China. A great amount of credit for this growth is attributed to the policies adopted by the Indian government and the youth, which forms a huge part of the population. With this growth, India is on the brink of a makeshift. It has become a major market for many companies and has paved way for huge corporations to set up their businesses and invest heavily.
In business, PESTLE analysis is very important. Originally designed as a business environmental scan, PESTLE analysis is an analysis of the external macro-environment in which a business operates. These are factors which are beyond the control or influence of a business, however are important to be aware of when doing product development, business or strategy planning.
PESTLE stands for:
For businesses to be set up, let us look at the PESTLE analysis of India.
India is the biggest democracy in the world. It is a federal republic. The political situation in the India is more or less stable. Most of its democratic history, the federal Government of India has been led by the (INC) Indian National Congress. State politics has been dominated by several national parties including the INC. The Bharatiya Janata Party (BJP), the Communist Party of India (CPI), and various regional parties are the other major players on the Indian political scene. In the 2009 Indian elections, the INC won the biggest number of Lok Sabha seats and formed a government with an alliance called the United Progressive Alliance (UPA), supported by various left-wing parties and members opposed to the BJP. Ideological inclination of political parties, influence of party forums, civil society etc. creates a political environment that promotes stability. In India, many political factors affect the business environment. For example, Bangalore established itself as the most important IT centre of India mainly because of political support. The major factors that affect the political environment are:-
India has a well developed tax structure with a three-tier federal structure, comprising the Union Government, the State Governments and the Urban &Rural Local Bodies. The power to levy taxes and duties are distributed among the three tiers of Governments, in accordance with the provisions of the Indian Constitution. The main taxes/duties that the Union Government is empowered to levy are Income Tax, Customs duties, Central Excise and Sales Tax and Service Tax. The principal taxes levied by the State Governments are Sales, Stamp Duty, State Excise, Land Revenue, and Duty on Entertainment and Tax on Professions & Callings. The Local Bodies are empowered to levy tax on properties, Octroi Tax on Markets and Tax/User Charges for utilities like water supply, drainage, etc.
Privatization reduces the political interface in the management of enterprises, leading to improved efficiency and productivity. India has adopted privatization in a big way. Most of the publicly owned enterprises have now been privatized. For example, a great part of the Indian Railways has been privatized which has improved the quality of service to a great extent.
After the reforms of 1991, the Indian government adopted a policy of deregulation. It has loosened its control on most industries which has helped the industries grow.
In order to solve economic problems, the government took several steps including control by the State of certain industries, central planning and reduced importance of the private sector. The main objectives of India’s development plans were:
Initiate rapid economic growth to raise the standard of living, reduce unemployment and poverty
Become self-reliant and set up a strong industrial base with emphasis on heavy and basic industries
Reduce inequalities of income and wealth
Adopt a socialist pattern of development – based on equality and prevent exploitation of man by man
As a part of economic reforms, the Government of India announced a new industrial policy in July 1991. The broad features of this policy as follows:
The Government reduced the number of industries under compulsory licensing to six.
Disinvestment was carried out in case of many public sector industrial enterprises.
Policy towards foreign capital was liberalized. The share of foreign equity participation was increased and in many activities 100 per cent Foreign Direct Investment (FDI) was permitted.
Automatic permission was now granted for technology agreements with foreign companies.
Foreign Investment Promotion Board (FIPB) was setup to promote and channelize foreign investment in India. The economic factors in India are improving continuously. India has the third highest GDP in terms of purchasing power parity. Foreign direct investment in India rose 13 percent to $50.81 billion in the first 11 months of 2011 from a year earlier. India is a very attractive destination for investing as can be seen below.
The Indian Economy is also witnessing a boom in the Retail sector. Almost 60 percent of the consumers are willing to try out new products and services. Around 44 percent of Indians are willing to invest in the stock market as the disposable incomes are going beyond the level of savings. The attitudes and thinking of consumers has also changed compared to the previous year because of a reduction in the dependence on male member or shopper.
According to a survey, Indian consumers are willing to spend more on home improvements (38%) and leisure holidays (37%). The Total retail market of India is Rs. 19.48 Lakh Crore of which Rs.0.126 lakh crore is organized. The organized market is growing at a rate of 28% and is expected to touch Rs. 0.206 lakh crore in 2011-12. The organized retail market share to total GDP is 2.1% and to that of private consumption is 3.4%. Organized retail share to total retail market is 6.5%, which is estimated to touch 8.1% in 2012-13.
Changes in social trends can impact the demand for a firm’s products and the availability and willingness of individuals to work. In India, for example, the population has been ageing. This has increased the costs for firms who are committed to pension payments for their employees because their staff is living longer. It also means some firms have started to recruit older employees to tap into this growing labor pool. It describes the characteristics of the society in which the organization exists.
Literacy rate, customs, values, beliefs, lifestyle, demographic features and mobility of population are part o the social environment. It is important for managers to notice the direction in which the society is moving and formulate progressive policies according to the changing social scenario India is the second most populous nation in the world with an approximate population of over 1.1billion people. This population is divided in the following age structure: 0-14 years – 31.8%, 15-64 years – 63.1% and65 years and above – 5.1%.
New technologies create new products and new processes. MP3 players, computer games, online gambling and high definition TVs are all new markets created by technological advances. Online shopping, bar coding and computer aided design are all improvements to the way business is done. Technology can reduce costs, improve quality and lead to innovation. These developments can benefit consumers as well as the organizations providing the products.
India, in the past decade, has witnessed a technological growth unparalleled. With the advent of Information Technology, India has become the most favored destination for IT projects. This has helped in creating employment and raised the standard of living of many. Most of the government projects are now been carried out in consultation with private partners who bring in high-end technology. For example, the Bandra-Worli Sea Link project in Mumbai was done in collaboration with a Chinese firm which helped the project technically.
These are related to the legal environment in which firms operate. In recent years in the India there have been many significant legal changes that have affected firms’ behavior. The introduction of discrimination and disability discrimination legislation, an increase in the minimum wage and greater requirements for firms to recycle are examples of relatively recent laws that affect an organization’s actions. Legal changes can affect a firm’s costs and demand. This consists of legislation that is passed by the parliament and state legislatures. Examples of such legislation specifically aimed at business operations including the Trade mark Act 1969, Essential Commodities Act 1955, Standards of Weights and Measures Act 1969 and Consumer Protection Act 196.
Environmental factors include the weather and climate change. Changes in temperature can impact many industries including farming, tourism and insurance. With major climate changes occurring due to global warming and with greater environmental awareness, this external factor is becoming a significant issue for firms to consider. The growing desire to protect the environment is having an impact on many industries such as the travel and transportation industries (for example, more taxes being placed on air travel) and the general move towards more environmentally friendly products and processes is affecting demand patterns and creating business opportunities. India has also realized the importance of these necessities and the government has laid down several norms for companies which they must adhere to if they need to run their businesses.
INDIAN FURNITURE INDUSTRY
The furniture industry in India is considered as a “non-organized” sector as it represents a small percentage (about 0.5%) of contribution to the formation of GDP. Moreover, the production is increasing every year. The furniture industry is categorized into various categories amongst which handicraft production is the major category which accounts for about 85% of the total furniture production in India.
The wooden furniture is the major part of this non-organized sector, which caters mainly to home furniture demand. Demand for household furniture is easily affected by economic conditions such as disposable income, interest rates, employment level and income growth. The total size of the Indian furniture industry is estimated at around INR 900 billion. Eighty five percent of this falls into the unorganized sector. The furniture market is growing by 12-15 per cent per annum. In fact, around 300,000 workers are held by the furniture industry.
FIVE FORCES ANALYSIS
THE BARRIERS TO NEW ENTRANTS
Barriers to entry explain the different criteria that could act possible barriers for companies to venture into new markets. For the Indian furniture market, the following could be the barriers:
• Cost of capital requirements
The capital required to set up a furniture business could be pretty heavy and companies would have look for investors in order to meet the heavy capital requirements.
• Experiences and knowledge
Since furniture business, in term of manufacturers and retailers, is considered as a shopping good which needs more time in selection so reputation is significant for the companies. Consistent with Imported furniture in India are booming, design becomes the first criteria in selecting furniture. This is influenced heavily by reputation and strong relation with customers and suppliers. How to begin and maintain the relationship along the value chain will help ensure survival in the furniture business. Developing relationships require knowledge and experiences which can be acquired and collected during operating in the market. This implies that this factor favors the companies already in the market.
The legal aspect is not much of relevance for India furniture industry in terms of an impediment. Rather, it provides the opportunities of lower tariffs for the new comers.
THE BARGAINING POWER OF BUYERS
In India the bargaining power of customers in furniture market is high. Most of the time in furniture buying process is spent in looking and shopping products and once consumers decide what to buy, they will buy from retail or wholesale stores. Furthermore, designed furniture increasingly becomes to the furniture trend in Indian market. Product design is mostly in hand of retailers or wholesalers since they meet the need of consumers who come to their shop therefore they know styles in the current trend. Porter suggests that retailers power become significant greater over manufacturers when they are able to influence consumer’s purchasing decisions. In case of India furniture market, the ability of retailers to shape future market significantly increases the power of the buyers.
THE BARGAINING POWER OF SUPPLIERS
The power of suppliers is in the same direction as the power of buyers in the sense that it can squeeze profitability out of the industry. Suppliers can use bargaining power over participants in an industry by raising prices or reducing the quality of goods or services. In Indian furniture industry the bargaining power of customers in furniture market is low. The modern design furniture rapidly becomes a furniture trend. Manufacturers produce furniture in various styles given by interior designers or retailers. This can lower the supplier power.
THE THREAT OF SUBSTITUTE PRODUCTS OR SERVICES
The stronger the substitution in the industry less profitable the industry is. Wooden furniture is the main product in Indian furniture industry. The potential substitution of tropical wood products is the obvious non-wood products. Aluminum or plastic products may be a substitute for wood products. The threat of the substitute aluminum is gradually high since the demand for aluminum product is gradually growing with the current prospects of Indian economic development in the coming decades. To compare with wood the advantage of aluminum is mainly its durability, high flexibility, easy maintenance and no rust.
RIVALRY AMONG EXISTING COMPETITORS
Rivalry among existing firms can be fierce. For a company to improve its competitive position, knowledge of its industry situation and its rivals is essential. The more the rivalry is intense, the less that industry is profitable.
• Number of rivals
The competitive environment in India furniture industry seems to be low in the terms of intensity since there are not many companies in the industry. However, foreign competitors through foreign investment play an important role in the industry because of the growing trend of imported furniture.
• The industry growth
Porter argues that slow industry growth leads to increasing competition since firms in the industry are inevitable to seek their expansion. From empirical findings, we found out that furniture market in India is growing positively every year. This implies that competition in the industry is not likely to be severe
• Product differentiation
In an industry, product differentiation plays a significant role in protecting from competitors as customers have preferences and loyalty to particular sellers according to Porter. In Indian furniture industry, design makes product differentiated and design rapidly becomes trend. This means competition in this industry tends to be weak as a lot of design options are available which can generate product differentiation to meet the customer’s specific needs.
INDIA – A GREAT PLACE TO INVEST
India has a very stable political environment which has been suitable for foreign investors and its policies over the last few years have been successful to attract FDI in various sectors This shows that India is a fruitful market for companies planning to invest and enter this market. India is an important member of WTO which urges it to abide by its rules and regulations. India has the second largest population in the world which makes it a huge economy as it also has a rapid and stable economic growth with low inflation rate and strong rupee value. India also has a cheap labor as compared to other developing countries. These indicators clearly signify India as a suitable place for the investors to invest. We have noticed that imported furniture is flooding in the market and growing up rapidly every year.
The government policy of allowing 100% FDI in single brand retail is an added motive and enhances opportunities for foreign players in entering into Indian market. The ability of retailers to shape future market is increasing, however, buyer’s bargaining power is exerted very little as it doesn’t appear to be one single buyer who purchases large volumes of furniture and supplier’s bargaining power is also low as most of products are in hand of retailers in view of product design. Competitive situation in Indian furniture industry is not too intense due to the high growth of the industry and a small number of companies in the industry.
3. IKEA IN INDIA
From the previous part, PESTLE and Five-Force analysis shows the great opportunity for the furniture industry in India. This time, with strong global presence and reputation itself, IKEA should really enter India for further profitability, by the large population and supportive business environment. This part we will explain the IKEA project organized in India by site selection and company strategy.
IKEA entering India seems to be a quite promising idea, and as a team we have thought of another aspect that could prove to be quite profitable for IKEA. We feel that hiring interior designers to visit people’s homes or apartment building and help them with the process could generate more sales. An experienced interior designer who is knowledgeable can help sell products and also make recommendations for the customers. Many customers who don’t have a good sense of fashion can be left clueless when trying to shop for furniture or other household accessories. The interior designer will have a catalog with them when they make the initial visit, browsing with the customer. The customer has to pay a flat rate for the interior designer and then what ever they want to purchase. By allocating an interior designer IKEA could make more money because sales people have a tendency to push products on people and create more sales for the company.
3.1 SITE SELECTION
According to the India government (2012), India consists of 28 states and 7 Union territories. Each state has a unique demography, history and culture, value and language (India government, 2012). Using this information it is important that the first store implemented into India is essential for further success.
Similar to China, India established the Special Economic Zones Acts (SEZs) in 2005 (Rawat, Bhushan and Surepally, 2011). The authors also point out that in investing there, a company will be given a variety of friendly business conditions e.g. incentives and tax exemptions. Supporting by Dohrmann (2008), SEZs will support business and will particularly enhance the competitiveness of export-oriented activities. IKEA might not be a direct exporter, but we see future potential that IKEA could establish the regional factory in India with the centre location connecting Asia and Europe and other branches.
There are a number of states that have been part of SEZs, e.g. Andhra Pradesh, Chandigarh, Gujarat, Maharashtra, Tamil Nadu etc. (SEZ India 2012). Our first location or destination for India is the Western part specifically Mumbai, one of India’s most intensive business hubs and residents, locates (Figure X). We plan to settle a store in suburbs which is near Mumbai, possibly between Pune and Mumbai. The reason why we select this district is its favorable business environments which possibly encourage IKEA’s performance immensely. This derived from the advantages of land value, SEZs preferential treatments and Mumbai economy.
Real estate and land value are one of main priorities in establishing a new store. Although IKEA might have plenty of capital, we need to ensure the investment will be made in order to continue to be lucrative and profitable. According to The Economic Times (2011), _’Property prices in the Delhi NCR region have escalated between 10-45% in the last one year.’,_ whereas Mumbai, on the contrary, the land value is subjected to fall 30% and even more as the developer was forced to sell the estate (Thakur, 2011). Therefore, IKEA had better started from less-costly area and when the firm keep progressing well, settling around New Delhi or Kalkatta can really be considered.
Since Maharashtas has become SEZs, it attracts MNEs and foreign investors for certain. Rawat, Bhushan and Surepally (2011) exemplify that Duty free was allowed for import procurement of products and materials for development, operation and maintenance. Also, the company will benefit from many types of tax exemptions, for example, an exemption from export income 50 or 100% (under conditions), from Central Sales Tax, service tax and state sales tax. Therefore, under SEZs Act, it is not only support cost-effective strategy for IKEA but also lead to future investment of the company in the region, for instance, establish the manufacturing site or regional assemble activity.
c. Mumbai’s developing economy and increasing population gives IKEA incentive to start business there.
Mumbai is renowned as India’s major financial and commercial capitol as generates 6.16% of national GDP (The Financial Express, 2008). Other emerging companies located in Mumbai will establish competition, but also ensure that business continues to grow. Furthermore, it was ranked among the fastest cities in India for business start-up (MMRDA, 2009) which would allow our company to continuously grow.
Regarding Demographic data, Mumbai is the largest city in regards to population. According to the 2011 census, the population of Mumbai city was more than 12 million (Figure Xb), (national population, 1.21 billion) and it has been increasing over time (BBC, 2011). Besides, in comparing to other major cities i.e. Delhi, Kolkatta and Chennai, Mumbai represented the greatest growth over three decades (Figure Xc).