The international business strategy of IKEA in india

Group 5 International Business Group International Business FOREIGN TRADE UNIVERSITY FACULTY OF INTERNATIONAL ECONOMICS

FOREIGN TRADE UNIVERSITY FACULTY OF INTERNATIONAL ECONOMICS -🙣🙣🙣 - PRESENTATION SCRIPT THE INTERNATIONAL BUSINESS STRATEGY OF IKEA IN INDIA Class: KDOE307.1 Guide Teacher: PhD Nguyen Hong Tra My Group: Hanoi, September 2022 Group International Business TABLE OF CONTENT CHAPTER ABOUT IKEA .4 1.1 Profile of IKEA 1.2 Overview of IKEA 1.3 Past noticeable actions and its achievements CHAPTER ANALYSIS OF INDIA MARKET 2.1 Reasons to enter India 2.2 Trends/Behavior of market 2.3 Challenges 2.4 PESTLE analysis 2.4.2 Economic .9 2.4.3 Social 2.4.4 Technology 10 2.4.5 Environmental .10 2.4.6 Legal 11 CHAPTER STRATEGY OF IKEA IN INDIA 12 3.1 Pressure of Cost reduction .12 3.2 Pressure of local responsiveness 14 3.2.1 Differences in Customer Tastes and Preferences 14 3.2.2 Differences in Infrastructure and Traditional Practices 15 Group International Business 3.2.3 Differences in Distribution Channels 15 3.2.4 Host-Government Demands 16 3.2.5 Rise of Regionalism .16 3.3 Strategy that IKEA has implemented on India 17 CHAPTER ACHIEVEMENTS IN INDIA 19 REFERENCE 20 Group International Business CHAPTER ABOUT IKEA 1.1 Profile of IKEA It was originally a general store founded in 1943 by Ingvar Kamprad, who was 17 years old At the time, the store handled whatever was in demand, but in 1947 it contracted with a local furniture store to start selling furniture at a discount, which proved to be a big hit, and from 1951 the store concentrated entirely on furniture sales Today, IKEA has become a global home furnishings brand, bringing affordability, design, and comfort to people around the world And their vision of "more comfortable everyday life for more people" has remained the same as the time when it was established By 2021, the company has expanded to a total of 445 stores and 225,000 total employees, with revenues of €41.9 billion And now IKEA is headquartered in Delft, the Netherlands, and mainly sells Ready-to-assemble furniture, Homeware, and Food products 1.2 Overview of IKEA This company develops large suburban sales outlets called "IKEA stores" in various countries The products are relatively inexpensive, and IKEA has developed its own semiassembled furniture with modern designs that customers can take home in their cars IKEA is part of the retail industry, and its retail sales share (2021) is as Figure1.In order of highest to lowest retail sales share is Products sold through stores, Products sold online, and Services to customers 97% of its sales are made up of furniture and other products and restaurants and other services account for only 3% of sales Group International Business Figure 1: IKEA retail sales in financial year 2021 Sources: https://www.inter.ikea.com/en/performance One of the most notable items of IKEA furniture is the Billy bookcase (Figure2), which have been sold by the tens of millions since the late 1970s Also, according to their website, it is sold every five seconds They say that the bookcase's popularity is due to how inexpensive they are, how long they have been around, and how easy they are to customize Figure 2: Billy Bookcase Group International Business Sources: https://www.ikea.com/ 1.3 Past noticeable actions and its achievements First thing is “Through cost control” For example, in 1953, they created a “Flat pack” that can pack the disassembled products as thin and small as possible so that they can be easily loaded into the trunk of a car and taken home In result, they could reduce not only their logistic costs but also the number of times the furniture was damaged during delivery Second thing is “Making the store into an amusement park” In 1960, the first IKEA restaurant opened The idea comes from something Ingvar observes: people leave the store at lunchtime to eat in one of the restaurants or street kitchens He realized that hungry customers buy less As a result, they could succeed in taking customers into the whole buying process and they could gradually lead customers to rather enjoy the store than just go to the store Thanks to these actions, in 2020, the company generated a global revenue of $45.4 billion and according to NRF, it was the ninth global retailer in the world, making it the most global furniture retail brand In comparison to Ashley HomeStore, second-largest furniture brand in the world, this company generated a global revenue of $3.3 billion in 2020 so the global revenue of IKEA is about 14 times higher than one of Ashley HomeStore Group International Business CHAPTER ANALYSIS OF INDIA MARKET 2.1 Reasons to enter India The Indian furniture industry is, as of now, very fragmented Instead of buying from giant chains or department shops, most individuals get their furniture from local carpenters or from furniture stands that operate outside established distribution networks This situation is, both an opportunity and a challenge that IKEA must evaluate when expanding The Indian furniture market is accelerating at a significant pace According to the national investment promotion & facilitation agency in India (2022), the furniture market is anticipated to achieve a CAGR of 11.97% during the five-year period 2018-2023 The demand for furniture mainly comes from northern and southern India India is the fifth largest furniture producer at a global level and the fourth largest consumer of furniture The Indian furniture market was valued at $ 17.4 Bn in the Q1 2021 and is predicted to reach $ 37.7 billion by 2026, growing at a double-digit CAGR of 13.37% during 20202026 As of now, IKEA does approximately 30% of its commerce online The digital presence that they have will be a strength in a country like India which, according to Indexmundi (2020), has an estimated 446 million internet users The size of the online furniture retail segment grew from $ 300 Mn in 2017 to $ 920 Mn in 2020 recording a compound annual growth rate (CAGR) of 32% This, in combination with the strong physical presence presents a unique opportunity for IKEA to reach both the digital generations and the older consumers, who prefer physical warehouses (National investment promotion & facilitation agency in India, 2022) Being the second most populated country on earth, there is a very sizable market to be reached in India The Hyderabad store will keep with IKEA’s characteristically large Group International Business warehouse-style stores, at "approximately 400,000 square feet," with "over 7,500 products"on offer "We expect at least million customers to visit the Hyderabad store in a year and overall our goal is to reach 200 million customers in three years in India," Antoni, IKEA’s deputy country manager for India said (Forbes, 2018) According to the Swedish media, the IKEA-concern has purchased four additional lots in the states Telangana, Maharashtra, Karnataka and Delhi/NCR These four states have a combined population of 232 million citizens which is larger than the population western Europe (~200mil) and could therefore become paramount for the success of IKEA in Asia (Industrinyheter, 2018) Antoni was also quoted as saying “Only 4% of India's furniture sector is currently 'organized,' so we see huge potential in the Indian market," "IKEA has already committed Rs 10,500 crores ($1.54 billion) to India, and this figure is set to increase as the brand expands in the country." 2.2 Trends/Behavior of market According to the government owned organization “Swedish wood”, there has been an increase in the demand for wooden furniture, especially pinewood, in India This is something that matches well with the identity of IKEA, since most of IKEAs best sellers and international classics are made from pinewood (Svenskt trä, 2020) 2.3 Challenges Despite all the above-mentioned opportunities on the Indian furniture market, there are also a few challenges related to the expansion into India The Indian furniture market is a Low-cost competition market where consumers are extremely price sensitive and it’s therefore cardinal for IKEA to be able to provide their service at the lowest price possible IKEA is what famous economist, Michael Porter, classifies as a low-cost defender company, meaning that they attempt to maintain a stable base of customers and products by competing primarily on price, supported by their focus on efficient operations (Viswanathan, Olson 1992, 45-57) This strategy, in combination with the experience from expanding into China, which required the retailer Group International Business to splash prices and increase local sourcing to remain competitive is extremely meaningful in tackling the Low-cost competition Furthermore, as of now, IKEA is only ranked as the th largest furniture supplier in India (Easyleadz, 2020) That might not sound like a problem because of how recent the expansion is, but in a country that is known as one of the most protectionist countries, competing against domestic companies is a challenge Therefore, it will be of utmost importance for IKEA to maintain good relations with the Indian officials to ensure a fair chance of competing 2.4 PESTLE analysis 2.4.1 Political - Allowing 100% FDI in the retail sector: This creates favorable conditions for foreign businesses like IKEA to invest directly in the Indian market without having to contribute capital to other domestic companies - Complex administrative framework: This means getting a license in India is quite difficult, and enterprises must deal with a ton of complicated paperwork in order for their businesses to start operating - Reduction of corporate tax: A tax cut from 30% to 25% has made India a prospective market for corporations 2.4.2 Economic - Increase in GDP: The annual GDP growth rate of India is 6.9%, which is supported by increase on investment, employment and expenditure India is one of the fastest growing economies and IKEA India may take advantage of this trend by broadening its product offerings and focusing on new parts of the country Analyzing the shifts in customer purchasing patterns and newly emerging value propositions is a good place to start Group International Business 2.4.3 Social - Large and young population: With 54% of the population are at the age below age 25 and as young people in India tend to like simple and modern designs This matches with IKEA style as the company is devoted to creating products that are cost efficiency and have minimalistic designs - Cultural differences between India and Sweden India is known for many cultural values that cannot be shifted so IKEA must market research and analyze carefully before entering this market - High disposable income: The number of households in India with a disposable income of $10,000 or more has been on the increase It is recorded from 1990 to 2015, the number has increased by twentyfold This mean Indian can spend more on goods and services, a sector that IKEA is currently operating in - Continued urbanization: To attract the Indian market, IKEA has introduced big stores in multiple densely populated area, and with 40% of India’s population will be living in urban areas by 2025 up from 31% in 2010, and the fact that they will account for more than 60% of consumption is nothing but ideal for IKEA 2.4.4 Technology - Research and development (R&D): India is a low spender (only 0.66% of the GDP) in comparison to the developed countries and emerging economic powers of East Asia In fact, India’s expenditure on R&D is lower than low and middle income Countries - E-commerce development: India is one of the most developed countries in Asia in technology sector With 446 million internet users and with young population, this is a great opportunity for E-commerce to develop However, others local Indian furniture competitors had also seen this trend so IKEA must take action before them 10 Group International Business 2.4.5 Environmental IKEA has advanced to become the third most renowned leader in the world for social responsibility and environmental sustainability since the introduction of its People & Planet Positive program in 2012 With an ambitious and forward-thinking agenda, IKEA's Corporate Social Responsibility (CSR) goals are focused on three major initiatives: - Healthy and sustainable living - Climate positive initiatives - Social equality and fairness 2.4.6 Legal - Legal policies and trading regulations: With the South Asian Free Trade Area (SAFTA), and Asia-Pacific Trade Agreement (APTA), IKEA is able to reach more countries in the region thanks to these laws and regulations - Don’t have specific legislations on privacy and data protection: Lack of particular privacy and data protection laws poses a threat to not only IKEA but also to any company looking to enter the Indian market One of the most important challenges for any firm is the protection of privacy and data Any instances of data leaking could have a significant effect on that business 11 Group International Business CHAPTER STRATEGY OF IKEA IN INDIA 3.1 Pressure of Cost reduction It refers to reducing the cost when a firm is competing in the global market For serving universal needs, cost reduction becomes a pressure on firms While serving globally, buyers are more substantial because several firms provide the same commodity with less price because of the low-cost location Therefore, reducing the cost becomes necessary in global markets so a firm's aggregate revenue won't get hurt if it provides its product in different economies at different exchange rates There are main ways IKEA has implemented: IKEA's Flat Packaging Innovation: IKEA has a technique of selling individual pieces of furniture as opposed to the entire item This enables flat packaging of the goods, making it simpler to carry them to retail locations Additionally, it offers customers the chance to select specially made items for their needs in accordance with their convenience IKEA is able to keep its product's cost low in this way Mass production: Every piece of furniture is mass-produced by IKEA They've repeatedly indicated their willingness to this They produce a wide range of designs, whether it be for dining tables, chairs, sofas, closets, beds, showcases, or anything else As a result, they are given discounts on both the cost of production and the acquisition of raw materials This is how IKEA is able to stick to its low-price approach thanks to the bulk production method Unique Construction Method: IKEA always aims at innovating new techniques and methods to maintain their low selling price while making sure that their customers have no complaints about the quality of the products One particular example is the honeycombstructure 12 Group International Business Honeycomb structure Regular structure With the honeycomb structure, IKEA can build a table without needing much wood to create the thickness of the table, while the regular structure requires a big piece of wood Independent shopping: By promoting independent shopping, this allows customers to shop on their own Thus, IKEA does not need to hire a lot of store staff This helps them to cut costs towards wages and provide customers with lesser priced products Also to allow customers to shop independently, they also print all the product details on the price tags Hence, customers can easily read the guidelines on the price tag and choose the furniture they want to buy without the help of employees Take it home policy: IKEA has a policy where the customers can carry their buys home by themselves on the same day Since customers can carry their own products, IKEA does not have to spend money on delivery cost from the store to the customer Promote Do it yourself (DIY): The company promotes a DIY environment, where it allows customers to install their own furniture They provide guidebooks and assembly charts to support customers in installing their own furniture Thus, the company does not 13 Group International Business need to pay any extra charges to internal or external teams for installation, thereby, maintaining their low price 3.2 Pressure of local responsiveness Pressures for local responsiveness arise from national differences in consumer needs and wants, infrastructure, business practices, distribution channels, and from hostgovernment demands Responding to pressures to be locally responsive requires a firm to differentiate its products and marketing strategy from country to country to accommodate these factors, all of which tends to raise the firm’s cost structure In the case of IKEA in India, the pressure for local responsiveness is relatively low because IKEA sells to the same basic customers worldwide: young, upwardly mobile people who are looking for tasteful yet “disposable” furniture of a certain quality standard for the price they are willing to pay inexpensively More specifically when facing the differences in the Indian market, IKEA has the following actions: 3.2.1 Differences in Customer Tastes and Preferences The Britishers had a significant impact on how furniture was made in India Post 18th century most of the furniture manufactured in the country was highly inspired by the English style This English style furniture was not only used by Britishers but was also highly preferred by Indian royals They had high aesthetic value with intricate carvings and typical forms of these furniture included chairs with high and straight backs and flat seats The furniture used today in India, at times, takes inspiration from the western world and other cultures but at the same time is high on Indian values as well Furniture eventually also became lighter and was customized to be applicable in regular households Therefore, IKEA does not need to change their designs too much to suit Indian preferences However, they still have a few changes to become more user-friendly With their signature Billy Bookcase and flat-weave rugs, IKEA will introduce many 14 Group International Business India-specific items and solutions like small things that make their customer’s life easier – in terms of storage, kids’ space, etc Their kitchen, for instance, is one area that will see IKEA innovate, selling spice boxes, idli-makers, pressure cookers, and flat pans or tawas (used to prepare rotis) In their textile section, the usual IKEA bed sheets come in hues of creams, whites, grays, and other solid colors, with some prints In India, there will be more bright colors and patterns The chain will be trying to win over its newest market with more color than usual, harder mattresses, alternatives to leather, foldaway items and service that appeals to a “do-it-for-me” culture: customers will be able to buy their kit ready-made 3.2.2 Differences in Infrastructure and Traditional Practices Real estate in India is more expensive than real estate in Sweden As IKEA is an ultra big-box retailer, if it has to survive in India, it will have to play on the volume metrics Real estate costs are highly prohibitive, and they will have to create products suited for the Indian climate and style IKEA stores are typically housed in an area of around 2.5 lakh sq feet and are traditionally located in suburbs This kind of land tract will only be available on the city outskirts and IKEA will have to join hands with land parcel owners if it is keen to acquire such large land parcels for its use Land acquisition will be a major hurdle for Swedish furniture retailer IKEA to set up its stores in India and it may have to even depend on public auction by the government The option of directly acquiring land has many issues involved and it may be a costly affair in terms of profitability for the company Therefore, IKEA will have to invest in realty, vendors, manpower, supply chain, product quality,etc For them, it is going to be a long-term affair as retail is very capital intensive IKEA may partner with real estate companies in India to reduce its capital investments and open up another channel of sales 15 Group International Business 3.2.3 Differences in Distribution Channels There is not much difference between distribution channels in the Indian market compared to other markets IKEA distribution channel members include that manufacturer, dealer, wholesaler, retailer and consumer In order to keep the advantage of low price on the products, IKEA must use the most direct and cost-effective way to transport the products from supplier to customer (Figure 3) Figure IKEA distribution channel in India Sources: by the author team 3.2.4 Host-Government Demands Economic and political demands imposed by host-country governments may require local responsiveness Overall, India is a friendly market for foreign businesses This is the largest democracy in the world with a parliamentary form of government India has jumped 79 positions from 142nd (2014) to 63rd (2019) in 'World Bank's Ease of Doing Business Ranking 2020 Apart from the basic legal requirements for a foreign business like IKEA, India does not have many special and strict requirements for the 16 Group International Business furniture industry Therefore, IKEA does not face many difficulties in terms of legal issues, threats of protectionism, economic nationalism, and local content rules when entering the Indian market 3.2.5 Rise of Regionalism Hinduism is the largest religion in India According to the 2011 Census of India, 966.3 Million people identify as Hindu, representing 79.8% of the country's population India contains 94% of the global Hindu population IKEA knows this and it has put pressure on IKEA's local responsibility The world over, IKEA’s in-store restaurants are a huge draw among shoppers The 1,000-seater facility at its Hyderabad store will be the firm’s biggest restaurant globally, the idea being to draw more shoppers, especially families With 37% of India’s population being vegetarian and even the non-vegetarians often avoiding beef and pork, IKEA’s menu will reflect that So its meatballs will have chicken and vegetables here instead In any case, about 50% of the menu will be “Indian:” samosas (a deep-fried snack), dal makhani (lentils), idli (a steamed rice cake), and biryani (a spicy rice dish) The other half of the menu will remain Swedish, with IKEA’s signature salmon and shrimp dishes In short, Pressures for local responsiveness arise from national differences in consumer needs and wants, infrastructure, business practices, distribution channels, hostgovernment demands and rise of regionalism In the case of IKEA in India, the local responsiveness is not so significant IKEA just needed to change a few details to fit the Indian religion as well as to be more friendly with the preferences of customers The rest IKEA retains the same framework and formula that made them successful in the domestic market It can be said that India is a suitable market for IKEA when the pressure from local responsibility is quite low 3.3 Strategy that IKEA has implemented on India The concept of fusing great quality with affordable pricing is the inspiration behind IKEA's global standardization strategy In this way, the company hopes to create 17 Group International Business furniture that is both useful and reasonably priced With high pressure for cost reduction and demand for local responsiveness is minimal, the best approach for IKEA in India is global standardization strategy IKEA's global strategy places a strong focus on the collaboration and interdependence between its parent company's headquarters, its subsidiaries, and its shops in India Figure Four International Strategies 18 Group International Business Sources: Pressbooks.lib.vt.edu Because customization means shorter production runs and the duplication of functions, which tends to increase costs, IKEA, which is pursuing a global standardization strategy, tries to avoid adjusting its product offering and marketing strategy to India's market conditions Instead, they seek to promote a product that is universally standardized and has Democratic Design at its core so that they can gain as much as possible from economies of scale IKEA uses democratic design as a strategy when developing and assessing the products they offer It has five characteristics: quality, function, form, sustainability, and cheap cost All five must be in balance for the design to be considered democratic Additionally, this uniform design remains unchanged globally, including India CHAPTER ACHIEVEMENTS IN INDIA Recognizing the potential of home furnishings, decor, and appliances, IKEA has opened doors to the Indian market since 2009 From 2009 to now, IKEA has made some significant progress To start off, IKEA has introduced a 400,000-square feet Hyderabad facility offering its signature do-it-yourself furniture The firm sources products worth over €315 million annually from India It has over 50 local suppliers and 45,000-plus direct co-workers and approximately 400,000 co-workers in their extended supply chain However, during the period from 2020-2021, India suffered a major break-out of COVID-19 which resulted in the company’s expansion plan not being executed Especially, in 2021 as the pandemic waves surfaced, the company had to close its Mumbai store and also halt online operations for a certain period due to the lockdown measures Yet, the sales of IKEA still recorded an increase in sales and some noticeable achievements such as starting e-commerce operations in Bengaluru during the year, and the retailer opened its maiden big box store in the capital city of Karnataka For the people of India, the company has extended its support by way of donation of food, 19 Group International Business rations, medical equipment, etc to the needy people and to minimize the spread of pandemic REFERENCE BizVibe “Top 10 Furniture Brands in the World 2020” [online] Available at: https://blog.bizvibe.com/blog/top-furniture-brands-world (accessed 05/09/2022) NRF “Top 50 Global Retailers 2020” [online] Available at: https://nrf.com/resources/top-retailers/top-50-global-retailers/top-50-global-retailers2020 (accessed 05/09/2022) Easyleadz 2020 List of furniture companies in India [online] Available at: https://www.easyleadz.com/lists/List-of-Furniture-Companies-in-India(Hämtad 2020- 0114) Forbes 2018 IKEA Will Finally Open Its First India Store, But Winning Customers Won't Be Easy [online] Available at: https://www.forbes.com/sites/leezamangaldas/2018/06/26/ikea-will-finally-open-itsfirstindia-store-but-winning-customers-wont-be easy/?sh=59a137e147fa&fbclid=IwAR3BhGTHwoyFKqSQgHAUW01gTuZ0Vdv_o7pd Mas4hHpsPc01Ul3_HxIIVLw (Hämtad 2020-01-14) Ideas for India 2021 India’s trade protectionism and low-productivity vicious cycle [online] Available at: https://www.ideasforindia.in/topics/trade/india-s-tradeprotectionism-and-lowproductivity-vicious-cycle.html (Hämtad 2020-01-14) Indexmundi 2020 internetanvändare [online] Available at: https://www.indexmundi.com/g/r.aspx?v=118&l=sv (Hämtad 2020-01-14) Industrinyheter 2018 IKEA öppnar varuhus i indien.[online] Available at: https://www.industrinyheter.se/20190803/26489/ikea-oppnar-varuhus-i-indien (Hämtad 2020-01-14) Investindia 2022 India: The Next Global Hub for Furniture [online] Available at: https://www.investindia.gov.in/sector/consumer-goods/furniture(Hämtad 2020-01-14) 20 Group International Business IKEA ”Snapshots The history of the IKEA brand at a glance” [online] Available at: https://about.ikea.com/en/about-us/history-of-ikea/milestones-of-ikea(accessed 02/09/2022) IKEA “Inter IKEA Group Financial Summary FY21” [online] Available at: Inter IKEA Group Financial Summary FY21 (accessed 06/09/2022) Svenskt trä 2020 Indien har potential att bli en viktig marknad för svensk furu i framtiden [online] Available at: https://www.svenskttra.se/om-oss/aktuellt/2018/3/indien-har-potential-att-bli-enviktigmarknad-for-svensk-furu-i-framtiden/ (Hämtad 2020-01-14) Viswanathan, Madhubalan; Olson, Eric M 1992 The Implementation of Business Strategies: Implications for the Sales Function pp 45-57 Wikipedia IKEA [online] Available at: https://en.wikipedia.org/wiki/IKEA (accessed 02/09/2022) 21 ... effect on that business 11 Group International Business CHAPTER STRATEGY OF IKEA IN INDIA 3.1 Pressure of Cost reduction It refers to reducing the cost when a firm is competing in the global market... expenditure India is one of the fastest growing economies and IKEA India may take advantage of this trend by broadening its product offerings and focusing on new parts of the country Analyzing the shifts... Rise of Regionalism Hinduism is the largest religion in India According to the 2011 Census of India, 966.3 Million people identify as Hindu, representing 79.8% of the country's population India