The international business strategy of IKEA in india

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

FACULTY OF INTERNATIONAL ECONOMICS

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PRESENTATION SCRIPT THE INTERNATIONAL BUSINESS STRATEGY OF IKEA IN INDIA

Class: KDOE307.1

Guide Teacher: PhD Nguyen Hong Tra My

Group:

Hanoi, September 2022

TABLE OF CONTENT

CHAPTER 1 ABOUT IKEA 4

1.1 Profile of IKEA 4

1.2 Overview of IKEA 4

1.3 Past noticeable actions and its achievements 6

CHAPTER 2 ANALYSIS OF INDIA MARKET 7

2.1 Reasons to enter India 7

2.2 Trends/Behavior of market 8

2.3 Challenges 8

2.4 PESTLE analysis 9

2.4.2 Economic 9

2.4.3 Social 9

2.4.4 Technology 10

2.4.5 Environmental 10

2.4.6 Legal 11

CHAPTER 3 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

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 4 ACHIEVEMENTS IN INDIA 19

REFERENCE 20

CHAPTER 1 ABOUT IKEA

1.1 Profile of IKEA

It was originally a general store founded in 1943 by Ingvar Kamprad, who was 17years old At the time, the store handled whatever was in demand, but in 1947 itcontracted 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 comfortableeveryday life for more people" has remained the same as the time when it wasestablished

By 2021, the company has expanded to a total of 445 stores and 225,000 totalemployees, with revenues of €41.9 billion And now IKEA is headquartered in Delft, theNetherlands, and mainly sells Ready-to-assemble furniture, Homeware, and Foodproducts

of highest to lowest retail sales share is Products sold through stores, Products soldonline, and Services to customers 97% of its sales are made up of furniture and otherproducts and restaurants and other services account for only 3% of sales

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 theirwebsite, it is sold every five seconds They say that the bookcase's popularity is due tohow inexpensive they are, how long they have been around, and how easy they are tocustomize

Figure 2: Billy Bookcase

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 “Flatpack” that can pack the disassembled products as thin and small as possible so that theycan be easily loaded into the trunk of a car and taken home In result, they could reducenot only their logistic costs but also the number of times the furniture was damagedduring delivery

Second thing is “Making the store into an amusement park” In 1960, the firstIKEA restaurant opened The idea comes from something Ingvar observes: people leavethe store at lunchtime to eat in one of the restaurants or street kitchens He realized thathungry customers buy less As a result, they could succeed in taking customers into thewhole buying process and they could gradually lead customers to rather enjoy the storethan just go to the store

Thanks to these actions, in 2020, the company generated a global revenue of $45.4billion and according to NRF, it was the ninth global retailer in the world, making it themost global furniture retail brand In comparison to Ashley HomeStore, second-largestfurniture 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 AshleyHomeStore

CHAPTER 2 ANALYSIS OF INDIA MARKET

2.1 Reasons to enter India

The Indian furniture industry is, as of now, very fragmented Instead of buyingfrom giant chains or department shops, most individuals get their furniture from localcarpenters or from furniture stands that operate outside established distribution networks.This situation is, both an opportunity and a challenge that IKEA must evaluate whenexpanding

The Indian furniture market is accelerating at a significant pace According to thenational 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 Thedemand for furniture mainly comes from northern and southern India India is the fifthlargest 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 toreach $ 37.7 billion by 2026, growing at a double-digit CAGR of 13.37% during 2020-

2026

As of now, IKEA does approximately 30% of its commerce online The digitalpresence that they have will be a strength in a country like India which, according toIndexmundi (2020), has an estimated 446 million internet users The size of the onlinefurniture retail segment grew from $ 300 Mn in 2017 to $ 920 Mn in 2020 recording acompound annual growth rate (CAGR) of 32% This, in combination with the strongphysical presence presents a unique opportunity for IKEA to reach both the digitalgenerations and the older consumers, who prefer physical warehouses (Nationalinvestment 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 largewarehouse-style stores, at "approximately 400,000 square feet," with "over 7,500

products"on offer "We expect at least 7 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 statesTelangana, Maharashtra, Karnataka and Delhi/NCR These four states have a combinedpopulation 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 brandexpands 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 issomething that matches well with the identity of IKEA, since most of IKEAs best sellersand international classics are made from pinewood (Svenskt trä, 2020)

a stable base of customers and products by competing primarily on price, supported bytheir focus on efficient operations (Viswanathan, Olson 1992, 45-57) This strategy, incombination with the experience from expanding into China, which required the retailer

to splash prices and increase local sourcing to remain competitive is extremelymeaningful in tackling the Low-cost competition

Furthermore, as of now, IKEA is only ranked as the 7th largest furniture supplier inIndia (Easyleadz, 2020) That might not sound like a problem because of how recent theexpansion 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 utmostimportance for IKEA to maintain good relations with the Indian officials to ensure a fairchance 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 withouthaving 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 inorder 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 fastestgrowing economies and IKEA India may take advantage of this trend bybroadening its product offerings and focusing on new parts of the country.Analyzing the shifts in customer purchasing patterns and newly emerging valuepropositions is a good place to start

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 arecost 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 do market research andanalyze 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 willaccount 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 ofEast Asia In fact, India’s expenditure on R&D is lower than low and middleincome 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 localIndian furniture competitors had also seen this trend so IKEA must take actionbefore them

IKEA's Corporate Social Responsibility (CSR) goals are focused on three majorinitiatives:

- 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 morecountries 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 butalso to any company looking to enter the Indian market One of the most importantchallenges for any firm is the protection of privacy and data Any instances of dataleaking could have a significant effect on that business

CHAPTER 3 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 Forserving universal needs, cost reduction becomes a pressure on firms While servingglobally, buyers are more substantial because several firms provide the same commoditywith less price because of the low-cost location Therefore, reducing the cost becomesnecessary in global markets so a firm's aggregate revenue won't get hurt if it provides itsproduct in different economies at different exchange rates

There are 6 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 thechance to select specially made items for their needs in accordance with theirconvenience 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 do 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 ofraw materials This is how IKEA is able to stick to its low-price approach thanks to thebulk 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 customershave no complaints about the quality of the products One particular example is thehoneycombstructure

Honeycomb structure Regular structure

With the honeycomb structure, IKEA can build a table without needing muchwood 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 Thishelps 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 onthe price tags Hence, customers can easily read the guidelines on the price tag andchoose 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 buyshome 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 assemblycharts to support customers in installing their own furniture Thus, the company does notneed to pay any extra charges to internal or external teams for installation, thereby,maintaining their low price