How Ikea of Sweden Got to India.

University Degree Business and Administrative studies

Global Perspectives

Case Study: How Ikea of Sweden Got to India

By the team:

Ms. Katia BASKOVA (Russia)
Ms. Eugenia TEUSKKINA (Russia)

, 27th November 1998

Executive summary

How will be the IKEA’ products and services into the Indian market?

What adjustments are or will be necessary to entry in the Indian market of furniture? ( culture, competition,
currencies, marketing and management)

What threats from local competition should IKEA take into account and how can these threats be counteracted?

What are the IKEA strategic global alternatives and what will be the future prospective?

Content of the report

I – :

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B –
C –
D –

II – :

III – :

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B –
C –
D –

IV – :

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B –

V –

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B –

VI – :

                    A –
                    B –
                    C –
                    D –

VII –:

A –
B –

– Ikea's timetable

Introduction

If retailers are to succeed in an overseas market, they must not only master the traditional skills of market segment cultural and economic traditions of the host country.

Ikea Svenska AB, founded in 1943 is the world's largest furniture retailer that specializes in stylish but inexpensive Scandinavian designed furniture. It has 128 fully-owned stores in 26 countries, visited by over 108 million people yearly, and worldwide sales of about $5.4 billion in 1994. Ikea's success in the retail industry can be attributed to its vast experience in the retail market, product differentiation, and cost leadership. The company is, perhaps, one of the World's most successful multinational retailing firms operating as a global organization based on its unique concept that the furniture is sold in kits that are assembled by the customer at home.

Ikea's mission is to offer a wide range of home furnishing items of good design and function, excellent quality and durability, at prices so low that the majority of people can afford to buy them (IKEA 1994). The company targets the customer who is looking for value and is willing to do a little bit of work serving themselves, transporting the items home and assembling the furniture for a better price. The typical Ikea customer is young low to middle income family.

I – The regulatory environment:

A – Political system:

A recognized political party has been classified as a National party or a State party. If a political party is recognized in four or more states, it is considered as a National party.

Congress, Bharatiya Janata party, Janata Dal, communist party of India and communist party of India is the prominent National party in the country. Congress Party ruled the country and it came to power.

Also, tenth Lok Sabhas (The Parliament) has been constituted so far, on 10th July 1991. But even the states, the regional parties or the non-Congress parties gained importance over the years.

But we have to make a point in saying that in depends on the political government, the business is more or less easy and so the GDP (gross domestic product) will be more or less high in the country where there is a "legal" business.

The importance of ethical issue in international business is fundamental to know who is responsible.

B – Legal system:

The judicial system in India is widely seen to be plagued by systemic problems, which require urgent and radical solutions. Cost of litigation probably is a part of the general inflationary trend in the economy.

Moreover, India is a member of the International Labour Organization and complies with convention, which it has ratified. It has enacted comprehensive legislation to provide a good working environment for labour and protect their interests. The Government continuously reviews various labour laws in line with changing circumstances specially industrial relations which are regulated by the Industrial Disputes Act that provides for just and equitable settlement of disputes through negotiation, conciliation, arbitration or adjudication.

But we have to focus on an important legal element in business: intellectual property. It represents a big asset of the company and in international business overview, we can consider that there are some risks (and their consequences) of copyright because the company which is "victim" of this unfair manipulation loses a lot of money and support some damages on its own brand image.

C – Cultural challenge:

In international business, the culture is very important and we can consider one fundamental element " the culture shock" where there are several stages in the difference of the country’ culture: the honeymoon stage (we know that it is a new culture and we want to be there), the irritation-hostility stage, the gradual adjustment and the bi-culturalism, at this stage, the company gets a comfortable way in the settlement of the new culture.

But, few countries in the world have such an ancient and diverse culture as India. India’s culture has been enriched by successive waves of migration, which were absorbed into the Indian way of life. And, the diversity lies the continuity of Indian civilization and social structure from the very earliest times until the present day. Modern India presents a picture of unity in diversity to which history provides no parallel.

Moreover, the Indian Council for Cultural Relations (ICCR) has been working to project Indian culture abroad and to bring to India the rich manifestations of international culture. It has thus become a major vehicle of international cultural exchange.

We can also focus on the Indian’s process of development, which has been accompanied by significant social changes and an increasing awareness about issues.

This period has also seen the burgeoning of the voluntary movement in India.

Today, the Government makes constant attempts to promote values like democracy and independence and India is working to have equal opportunities in all spheres of life. We cannot rule out the Indian Art, because it is also an Art of social, political and religious influences. It changed and evolved with the evolution of a civilization, which is full of remarkable innovation.

Finally, we can make point on Indian religion, because it is another way of life and an entire part of Indian tradition. So in ...

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This period has also seen the burgeoning of the voluntary movement in India.

Finally, we can make point on Indian religion, because it is another way of life and an entire part of Indian tradition. So in doing business with India, IKEA have to make attention with the culture and the communication (verbal and non-verbal) because the communication can be interpreted in different meanings and can provoke some mistakes, misunderstanding and also some troubles.

So, the firm has to be careful with the context where it decides to set up its business.

D – Economic system:

The seventh largest and second most populous country in the world, India has long been considered as a country of unrealized potential. But a new spirit of economic freedom is now stirring in the country and India presents a wide range of opportunities and challenges. So, the subtle dimensions of India’ business environment tend to change quite rapidly. A series of ambitious economic reforms aimed at deregulating the country and stimulating foreign investment has moved India firmly into the front ranks of the rapidly growing Asia Pacific region. We can also underline and understand that a business like Ikea would like to tap its economic opportunities.

Moreover, India has no fundamental conflict between its political and economic systems and its political institutions have fostered an environment supportive of free economic enterprise. India’s time tested institutions offer foreign investors a transparent environment that guarantees the security of their long-term investments.

We can conclude by saying that India is today one of the most exciting, emerging markets in the world and with a cutting edge in global competition.

II – Competitive environment:

Ikea's strategic positioning is unique. Few furniture retailers anywhere have engaged in long-term planning or achieved scale economies in production.

European furniture retailers are much smaller than IKEA. Even when companies have joined forces as buying groups, their heterogeneous operations have made it difficult for them to achieve the same degree of co-ordination and concentration as IKEA.

Customers are usually content to wait for delivery of furniture, so retailers have not been forced to take purchasing risks.

The value-added dimension differentiates IKEA from its competition. IKEA offers limited customer assistance but creates opportunities for customers to choose transport and assemble units of furniture.

A manager provided the best summary of the competitive situation

" We can’t do what IKEA does and IKEA doesn’t want to do what we do".

To describe specially the competitive Indian environment, we can underline that India has altered its development strategy in terms of stabilization and structural reform.

The challenge of India is to:

reduce the country’s chronically high fiscal deficits
further liberalizing the economy
meet the infrastructure challenge

So, after the most important threat to India’s long term growth and even after significant trade reforms, India’s tariff and non-tariff barriers remain among the world’ highest.

Finally, to capitalize on production stability acquired through diversification, India will have to establish a truly nation wide market stimulated by foreign competition.

III - The internationalization of IKEA

A - Alternative entry strategies

Conceivably, a new firm could create large-scale subsidiaries abroad or could even be formed for international business purposes. However, four forms of entry strategies are used by the majority of firms that initiate international business activities: indirect exporting and importing, direct exporting and importing, licensing, and franchising.

The fourth international entry strategy, franchising, is the granting of the right by a parent company (the franchiser) to another, independent entity (the franchisee) to do a business in a prescribed manner. This right can take the form of selling the franchiser’s products; using its name, production, and marketing techniques; or using its general business approach. Usually franchising involves a combination of many of these elements. The major forms of franchising are manufacturer-retailer systems (case of IKEA), manufacturer-wholesaler systems (such as soft drink companies), and service firm-retailer systems (such as lodging services and fast food outlets).

The practice of franchising has made impressive gains in the past decade. The reasons for the international expansion of franchise systems are market potential, financial gain, and saturated domestic markets. In some cases, franchising expansion is also a reaction to competitor's entry into foreign markets.

Franchising by its very nature calls for a great degree of standardization. In most cases, this does not mean 100 percent uniformity but, rather, international recognition (see IKEA´ products).

Even though franchising has been growing rapidly, problems are often encountered in international markets:

⇒ host government regulations and red tape;

⇒ high import duties and taxes in foreign environment;

⇒ monetary uncertainties and royalty retribution to franchiser;

⇒ logistical problems in operation of international franchise system;

⇒ control of franchisees;

⇒ location problems and real estate costs;

⇒ patent, trademark, and copyright protection;

⇒ recruitment of franchisees;

⇒ training of foreign franchisee personnel;

⇒ language and cultural barriers;

⇒ availability of raw materials for company product;

⇒ foreign ownership limitations;

⇒ competition in foreign market areas;

⇒ adaptation of franchise package to local markets

A major problem is foreign government intervention.

Many franchise systems have run into difficulty by expanding too quickly and granting franchises to unqualified entities. Although the local franchisee knows the market best, the franchiser still needs to understand the market for product adaptation purposes and operational details. The franchiser, in order to remain viable in the long term, needs to co-ordinate the efforts of individual franchisees; for example, sharing ideas and engaging in joint undertaking such as co-operative advertising.

B - Expansion by franchising

Ikea approaches unknown, relatively small, and high risk markets by franchising. The expansion group is active in this field as well, as it provides the same pre-opening activities as in opening firm-owned subsidiaries. Franchisees have to carry basic items, but have the freedom to design the rest of the product mix to fit local market needs. The basic core items amounts approximately 12,000, simple and functional products. The centralized head office is actively involved in the selection processes and provides advice. In addition, all products have to be purchased from Ikea's product lines. In order to maintain service, quality and logistic standards, individual franchisees are periodically audited and compared to overall corporate performance. Extensive training, and operational support is provided from the headquarters. All franchisees pay franchise fees to Ikea holdings. All catalogues and promotional advertising is the responsibility of the headquarters. Franchising has been used as a vehicle to the company's generic focus strategy.

C - Supporting organizational structure

The present organizational structure can be defined as highly functional with a global market strategy. In such a structure, Ikea is able to maintain centralized control over functional activities and at the same time take advantage of low cost and enhanced quality from international suppliers. In addition, control over strategic direction is enhanced and functional redundancies are minimized. In order to ensure efficiency in the logistics process, the organization has integrated purchasing and distribution processes under one umbrella function referred to as "Wholesale" (IKEA 1994).

D - Balance of autonomy and strategic direction

As Ikea continues to expand overseas, the significance of centralized strategic direction will increase. Naturally, rapid internationalization will trigger a range of challenges imposed on the headquarters in Sweden: Such challenges include:

⇒ The complexity of the logistics system will increase;

⇒ It will be more difficult to respond to national needs and cultural sensitivity issues;

⇒ Franchisees may demand more control over operations;

⇒ Emerging demographic trends will force the organization to broaden its focus strategy to respond to varying nation-level consumer groups;

With all these challenges emerging, it will be very difficult to maintain a global organizational structure. The best approach to meet these challenges is to find the proper balance between country level autonomy and centralized intervention. Likewise, intensifying and responding to local rivalry (such as Freedom in Australia) requires increased subsidiary/franchisee autonomy.

With reference to Ikea's long-term relationship and control over its suppliers in exchange for quality assurance, technology transfers and economies of scale factors may trigger potential suppliers to integrate forward and produce competitive products for Ikea's local competitors. With logistics complications and long lead times, Ikea is forced to maintain high control levels over its suppliers. For instance, if the supplier responsible for the screw component to a table cannot deliver on time, the supplier of the tabletop has to adapt its production to the new scenario. Without Ikea's centralized logistics system, this example could lead to severe store shortages, leading to losses in sales.

IV - International financial market

A - The foreign exchange market

The foreign exchange market allows firms to buy and sell currencies spot (for immediate delivery) or forward (for delivery at a future date). This market is composed of a network of foreign exchange traders for international banks. The foreign exchange market is highly competitive, with prices adjusting rapidly to demand and supply influences. The most important economic factors influencing exchange rates are relative inflation and interest rates.

The Indian Rupee has been convertible on the trade account since August 1994. Capital inflows on one side and the Reserve Bank of India on the other have kept it sandwiched at 31.37 INR to the US dollar since around August 1992. The spot market is incredibly liquid, but this is largely a consequence of there being a last-resort buyer (the Reserve Bank of India) and supply generally exceeding demand. However, even on exceptional days, it is fairly easy to buy USD 100 million or so during the day. Selling is not a problem at all, as the Reserve Bank has been the last resort buyer.

There is an active forward market, which is fairly liquid in the first month, and quotes are easily available up to six months. Since July 1993, a lot of one-year deals have also been taking place. The Reserve Bank permits banks to deal in the USD depot market within India, but access to the international market is very restricted. This, and the fact that there is really no properly developed term market in INR depots, means that the connection between FX swaps and interest rates is tenuous at best. However, this is also steadily improving, and most dealers foresee a very active market up to one year soon.

Both these markets exist only within India. The Reserve Bank prohibits any international speculative access to the Rupee. However, there is practically complete freedom to hedge any existing exposure arising out of commercial activity.

The foreign exchange market in India is growing in both volume and depth. The banks both on a spot and on a forward basis facilitate various kinds of transactions. These include hedging transactions such as currency swaps and interest rate swaps.

Foreign and Indian banks also assist in offshore loan syndication. Other services provided include, financing of foreign trade, arranging the most economical source of supplier credit, etc. Banks also assist in foreign exchange management such as currency management strategies and designing, assessing of liability structures vis-à-vis swaps, interest rates, income, etc.

B - Currency options and futures

Two relatively new developments in the foreign exchange markets are options and futures on the major currencies. An option gives the holder the right to buy or sell foreign currency at a pre-specified price (the strike price) on or up to a pre-specified date (the expiration date). A call option gives the holder the right to buy foreign currency while a put option gives the holder the right to sell the currency. The most important difference between the currency options market and the forward market is that a transaction in the options market gives the participant the right to buy or sell while a transaction in the forward market entails a contractual obligation to buy or sell.

The currency futures market is conceptually similar to the forward market. That is, to buy futures on the pound implies an obligation to buy in the future at a pre-specified price. Similarly, to sell Rupee futures implies an obligation to sell the currency in the future at a pre-specified price.

The primary difference between the futures market and the forward market is that the minimum transaction size is much smaller on the futures market.

This market therefore allows relatively small firms engaged in exporting and importing to "lock in" exchange rates and lower risk.

V- IKEA financial strategy

A - Joint Ventures

Ikea will need to look at joint ventures and strategic alliances to become successful in the Indian market. Since the government requires that local business operations require 51% control by Indian nationals, Ikea's first step will be to find franchise owners. These in turn will have to form alliance and joint ventures to raise enough capital to develop the links necessary to form a successful entity.

In high-risk markets (defined as those that are not similar to Scandinavian markets) Ikea's local market strategy is to develop supplier links in the host country. This is meant to reduce the strategic risk that may result from political legal and financial issues. By developing a relationship with local suppliers, the suppliers can provide valuable input into the opportunities and threats.

Joint Ventures mean even more. They establish that the local owner/operators become an integral part of the stakeholder group. It is expected that they will therefore be more contentious of operations and therefore be more successful.

B - Profits

Profits in India should be maintained at a similar level to other countries. Since the per capita income of Indian peoples is substantially lower than other markets, product will have to be modified to lower price categories and volumes will have to increase to offset the difference. Except in the largest cities, operation costs should be lower than Western Europe. Labour costs are substantially lower in India, but the Ikea store concept requires little human resources, so cost reductions must rely on other overhead such as store, warehousing, power, taxes and advertising. Probably the most effective method for cost reduction is to source a higher percentage of goods form India. Even Scandinavian designs could be reproduced in India.

Financial Strategy:

The cost of establishing a new store (approximately 22,000 items) is quite high when considering:

Building acquisition, layout and design
Sourcing franchise owners and human resources
Establishing local supplier links
Advertising and promotion of the new location (catalogues are expensive)
Stocking the new store

The advantage of borrowing money locally is that the cost of borrowing will be protected from inflation and exchange rate fluctuations. Investment money taken from reserves of other operations may not carry any interest cost and therefore be a cheaper source of investment. In the case of India, if Ikea decides to franchise its operations there, the problem of financing the operation is taken care of through franchising fees and royalties.

Return of profit/royalties to Ikea of Sweden could be facilitated in the transfer of product produced in India thus increasing the marginal return from everyone involved.

VI - IKEA marketing strategy

All marketing is based on IKEA business idea: "We shall offer a wide range of home furnishing items of good design and function, at prices so low, that the majority of people can afford to buy them".

The company's target customers are people, who are looking for value and who are ready to do some work serving themselves, transporting the items home and assembling the furniture for a better price. The typical IKEA consumer is young low and middle income family. In India now the middle class is not far from 40% of the whole population, it has grown up on 200 million people after the production, trade and investment reforms in 1991.

A - Where do the target customers live? Where to sell?

India's economy is a mixture of traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and the multitude of support services. So, most of people live in small towns and don’t earn much. But IKEA is interested in those, who live in cities and towns, so, it is better to set IKEA shops first, in the capital, Delhi (there are several main shopping areas in Delhi like Sadar Bazaar, Janpath, Palika Bazaar, Connaught Place, Ajnal Khan Market, INA market, Greater Kailash, Green Park and many others). It has sense to set up a shop not far from at least one of these main shopping areas. Or, it could be set not far from the centre in one of those areas, where most of houses are situated, and then in the biggest cities in states with the highs level of urbanization, such as Munbai (Maharashtra), where about 38,7% of population live in towns, Gandhi Nagar (Gajart), with ratio of urban population about 34,5%, and Chennai (Tamil Nadu) where 34,2% of people live in towns.

B - What to sell?

The IKEA Concept is built on the following points: a wide range of IKEA home furnishing products, the IKEA catalogue and the IKEA trademarks.

There are about 12,000 products in the total IKEA product range. The core range is the same worldwide. Of course, not every shop, only the biggest, can carry all these range, so, each store sells a selection of these 12,000 products depending on the store size. The rest products are available by a catalogue.

C -How much does it cost?

IKEA’s success is based on the relatively simple idea of keeping cost between manufacturers and customers down. According to the Ingvar Kamprad, the founder of IKEA: "To design a deck which may cost $1,000 is easy for the furniture designer, but to design a functional and good deck which shall cost $50 can only be done by the very best. Expensive solutions to all kinds of problem are often signs of mediocrity."

Costs are kept under control starting at the design level of the value-added chain. IKEA also keeps prices at the low level by packing items compactly in flat standardized cartons and stacking as much as possible to reduce storage space during and after distribution in the logistics process.

Exactly this approach at the minimizing costs will make IKEA furniture so attractive to the Indian’s consumers.

D - Promotion

To facilitate shopping, IKEA provides catalogs, tape measures, shopping lists and pencils for writing notes and measurements. Effective marketing through catalogues usually attracts the customer at first, what keeps them coming back is good service. These catalogues are available in any IKEA store (prices are guaranteed not to increase while the catalogue is valid, which is again attracting consumers).

The outlets in India can also make success by sending the direct mail to the potential customers. Another good way of promotion could be television advertising, because of its wide auditorium. For example, the main canal, Doordarshan (The Indian National Television Network) has the maximum reach in the country. It covers approximately 85% of the Indian population.

Large number of services, which IKEA provides to is customers, is also can be attractive for new consumers. Many IKEA stores offer a home decoration or kitchen planning service. The IKEA store also offers a home delivery service (which is not included in the product price) and a generous return policy.

VII - IKEA management strategy

IKEA is a very successful multinational corporation, which indicates that earlier discussed focused generic, or long-term strategy of cost leadership and product differentiation has served it well. IKEA approaches unknown, small, high risks markets by franchising. So this company actively expands in this field as well.

IKEA has a lot of subsidiaries in many countries of the world. Franchisees have to carry basic items, but have the freedom to design the rest of the products.

The corporation is going to improve its positions in Asia markets. So there will be an active expansion in Indian markets, because of different reasons:

India has a big economy,
A lot of resources (human, natural, etc.)

India has a very cheap labour and in big quantity. So it will be very profitable to hire local population. For example, total labour force is about 337 million people; by occupation: agriculture 65% or more, services 4%, manufacturing and construction 3%, transport 3%.

The subsidiaries will be located in huge cities of India because of large share of manufacturing population. India has a large unemployment rate, so there will not be problems to occupy labour places. The recruitment should be done in such directions:

widely advertising in print media
Visiting industrial training schools or contract local employment exchanges.

IF YOU ARE OUT-GOING, DEDICATED, CUSTOMER-SERVICE ORIENTATED AND INTERESTED IN WORKING AS PART OF A TEAM, SO YOU ARE WELCOME TO WORK FOR A COMPANY.

The centralized head office will be actively involved in the selection process and provide advice. In order to maintain service, quality and logistic standards, franchisee will be periodically audited and compared to overall performance. The headquarters will provide extensive training and operational support to the workers of all kind.

The workers will be provided with well-paid jobs, supplied with fringe benefits, given discounts on the production of the company. All the ideas and initiatives are welcome. Nowadays IKEA is changing its organizational structure. IT is necessary as a result of moving the organization from a global towards a transnational perspective. The new organization would be flatter and delegate more responsibility to subsidiaries. So the Indian Company will be less controlled from Sweden. The centralized Research and development department would have form internal strategic networks with, in a collaborated manner, develop products which are adopted to match country level needs. Of course it will increase the complexity of the IKEA operational culture, but will enhance decision-making based on a true international dimension.

A - Cost leadership as a part of the management process

The main objective of IKEA is to produce high quality products at a low price. It is furnishing the customers with a quality product with components derived all over the world utilizing multi-level competitive advantages, low-cost logistics, large simple retail outlets in suburban areas.

Furthermore, cost-leadership has been effectively incorporated into the organization's culture through symbols and efficient processes. In return for high sales volume, IKEA accepts low profit margins. Cost reduction does not mean reducing the quality of the variables, but rather do things better and more efficiently. A general low-cost-leadership strategy will only work effectively when the organization can provide products or services at a lower cost than the competition.

B - Differentiation strategy

In order to furnish customers with good quality items at a low cost, the firm must be able to find suppliers that can deliver high quality items at low cost per unit. This strategy is also aimed at delivering products and services that are different from the product mix of the competition.

Differentiated products are often marketed at premium prices in order to cope with added costs of differentiation, leading to higher profit margins.

Ikea's value chain.

So it is possible to conclude that IKEA effectively aligns its cost leadership platform, with focus on the needs of its target market segment, differentiation also focuses on this particular segment.

Conclusion

Together with innovative changes in the value chain, where consumers become Pro-sumers and suppliers are turned into consumers, the concept of marketing high quality products at low cost through a focused generic strategy, intended for the globally emerging middle-class has served Ikea well. Centralized control and product standardization is two necessary components of the firm's long-term strategy. In addition, the company has facilitated its international expansion through owned subsidiaries and franchises. Future localization pressures will force Ikea to change its global strategy in order to become more sensitive to local demands. Greater emphasis on joint ventures and strategic alliances represent possible vehicles to further build on Ikea's focus strategy. A new transnational oriented organizational structure would further provide the necessary infrastructure needed to support such vehicles towards true internationalization. This in turn would impact on the present homogenous Scandinavian culture and introduce new values, ideas and, perhaps, broaden Ikea's core competencies.

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