Crucial external Factors for Market Entry
This report will evaluate the given case and the external factors of IKEA to identify the risk factors for entering into Russia. It will also identify all the elements required for establishing a strong presence in an undeserved market. The report will conclude by discussing IKEA’s strategy for establishing large shopping complexes instead of standalone shopping centres. IKEA is the market leader in this segment offering home accessories, kitchen appliances and ready-to-assemble furniture’s. Ingvar Kamprad is the founder of the company and it’s a Dutch multinational company founded by a Swedish person (IKEA, 2018). The organization has been known for providing modern furniture at minimum prices taking into consideration a eco friendly approach towards its resources.
The different external factors affecting the market entry of a company are socio-cultural factor, competitive environment, country risk, demand uncertainty, market size and market growth (De Villa, Rajwani and Lawton, 2015). Market size is a crucial factor in making an international entry because large countries large countries require large investments and commitments such as equity participation and wholly owned subsidiaries. Market growth is the next key factor as companies invests in markets with future potential growth. The markets such United States, Germany, United Kingdom European countries and Japan have string well developed market. There are industries in these markets that are already saturated such as consumer electronics, automobiles and retail. Therefore, the growth of these countries is declining due to it saturation and countries that are still developing will have the plenty of opportunity of growing. Therefore, investing in such countries would prove to be more beneficial for the companies in the international market.
The legislative framework of the foreign market will greatly affect the market selection for companies. This is due to the fact that local government rules and regulation may to extra barriers to entry by adding cost and other restrictions to protect the local companies in the market. The gulf countries have made it compulsory to form partnership with the local companies to operate in their market. The level of competition in the foreign market also has to be considered so as to identify the market forces operating in that country (Cavusgil and Knight, 2015). Therefore, the organization will have to identify ways to respond to the competition in the global market to increase in the level of competition. The infrastructural aspect of the foreign market is also an important factor as in order to commit more resources into the market the roads, telecommunication, railways, market channels and financial institutions have to be developed. The infrastructural development of any country attracts more foreign market entries and the best examples are Dubai, Hong Kong and Singapore where the level of investment increased due to their infrastructure.
PEST of Russia
A firm have to always identify the risk factors before entering into the market which could be political, operational and economic. The political instability will have a deep impact on the resources of any organization and they will not be able to commit more resources into the market. The economy of the target market has to be stable and should have potential growth. The factors such as exchange rate volatility, balance of payment upheavals will affect the resources and marketing activities (Lee et al., 2015). Moreover, it is tough to maintain operations in countries where the inflation rate is high. Demand uncertainty is a phenomenon where the company is unable to identify the fluctuations in demand. The countries where the fluctuation is demand is high will have the risk in maintaining their inventory.
In context to the case study of IKEA in Russia it can be seen that IKEA did not analyse the political environment of Russia effectively. The political instability affected their business at all times due to the change in the government official. Moreover, they were not aware of the rules and regulations which made them face issues from the health, fire and safety department. The level of corruption in Russia is high and the company would have to either change their policies and cooperative with the government officials by paying them bribes or not entering in to such markets. The market size in Russia is huge but the negative factors had prevented IKEA from using their resources to the fullest.
In the current context, PEST analysis would be used for studying the external factors that would be having an influence on IKEA in Russia. The PEST analysis would be inclusive of the four factors: political, economic, social and technological.
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Political |
Politics and policies in the Russian Federation saw many changes since the selection of their current president Putin in 2000. The country has become internationally active and crucial for foreign companies (particularly Finnish firms) because of a lot of factors: abundant natural resources, geographical position, geopolitical tension with other countries and military capability. It is a federal presidential republic with centralized legislative and political power. However, with elections and new leadership possibilities, the business environment is running at a risk. IKEA must also take into account the factor of corruption while entering Russia. High level risks include corruption, bureaucracy, irregular payments and bribes across all sectors. |
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Economic |
The Russian economy is extremely volatile and unpredictable, highly dependent on oil prices. From the 2008 global economic crises, Russia continued running on recession till 2015 also. The crisis reduced the demand for furniture products, but it was later on managed. In case of the furniture industry also, labour productivity is inefficient in comparison with other Western countries. Low oil prices, international sanctions and geopolitical tensions pushed Russia into remaining in recession. The unemployment rate remained stable between 5-6% since 2012. Russia’s floating exchange rate has helped the country adapt a lot to different external shocks stabilizing the inflation. Other than that, there are a lot of domestic risks and uncertainties like household saving attitude and exchange rate volatility. The economy is majorly dependent on their energy exports, but the financial sector is stabilized and there is a growth in the domestic business confidence. |
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Social |
Social factor has a significant impact on the furniture segment in Russia. One of the most important aspect in this factor is the growth in population. The population of the country is increasing every year and along with it is growing the amount of young families, which in turn is looking forward to an increase in the demand for furniture products. However, there are major differences in the population density levels of the country. There are some basic administrative and infrastructural services, which, however, get affected by the lack in modernization and corruption. The country’s physical infrastructure is rather poor and ineffective, which in turn limit economic growth, income opportunities, labour mobility and the whole welfare of the country. IKEA needs to focus on big regions when entering the country, like Saint Petersburg and Moscow. In the Russian society, among the 50-79year olds there is a prevalence of shortened working lives and unproductivity. Due to this, there is an upcoming demographic crisis in Russia. The Russian social security system, however, has seen advancements. The Russian Orthodox Church influences the values and beliefs of the Russian society. |
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Technological |
In general, Russia is a poor performer in main innovating, apart from their successful software exports. A major reason is due to the state-owned enterprises blocking competition, as they are dominating the market and taking away the required skills and finance for development and innovation. The country’s state education system quality is poor, especially in terms of research and development. The economic crisis negatively affected the R&D and innovation development. Digitalisation and the growing internet services have been playing a crucial role in conducting businesses in Russia. The retail market turnover of the country has seen steady growth, which can be beneficial for the furniture market also. There is scope for R&D, innovation and new technology in Russia, along with skills and expertise. |
Table: (Theseus.fi, 2013)
Understanding the PEST analysis in the previous section has given the outcome that there are a lot of risk factors that IKEA has to face if they are operating in Russia. IKEA needs to be very much aware and conscious of the possible corruption and inefficiency in the country’s judicial system and the legal and regulatory issues in Russia. IKEA would be subject to poor level of openness, with existence of complex tariff structure and both domestic and foreign market access. In terms of doing business in Russia, IKEA has to face problematic factors like tax regulations, access to financing, inflation, inefficient government bureaucracy and policy instability (Theseus.fi, 2017). IKEA also has to take note that the Russian society rapidly experiences changes, waiting for an impending demographic change. IKEA would have to constantly monitor these changes, along with keeping their distribution chain short. IKEA still has to make sure that the social media and internet needs to be properly utilized in the furniture industry in Russia, keeping in mind at the same time that their culture is focused on extravagance. Based on these factors, it can be said that Russia’s furniture industry is improving and there are major rooms for improvements.
Risk faced by IKEA
Globalization has the market scenario effectively where the underserved market presents the opportunity of accessing a million-trillions dollar market. These untapped markets are offer the chance of building significant revenue and add to the social needs. However, there are certain risk factors in entering into an underserved market so the company will have to analyse these factors before entering into such markets. There are five key factors which should be used by the companies before entering into an untapped market. These factors are mining and translating of information, changing the internal incentives, challenging the cultural assumptions, making changes to the business model according to the realities in communities, strategic alliance, partnership and make improvements in the enabling environment (Karakaya and Parayitam, 2018). This shows that before making an entry the organization will have to gather all the necessary information about the market so that they are fully aware of the opportunities and threats they will face if they invest in the untapped market. This will enable them to launch a new format to a country and there are many aspects in which these countries are lagging behind. Therefore, introducing a new product and idea is crucial for gaining success in untapped markets. Innovation is the key to sustaining in a developing market where there is increase in growth due to the increase in competition from the other global competitors trying to make an entry into the market.
The organization will have to make changes to their business model according to the market requirement in the foreign country. Flexibility within the organization would provide the organization with the chance of taking advantage of the positives in the market. The safest way to make a strong presence into an underserved market is forming strategic alliance. The organizations already present in that environment are well aware of the market characteristics so forming partnership will enable them to easily grab on to the opportunities in the market and avoid the threats.
IKEA’s idea of developing large shopping complexes instead of stand alone shopping centres was absolutely logical as large shopping complexes generated more revenue than the standalone shopping centres. Moreover, the market size was huge so would have been able to serve a large number of consumers. However, the analysis of the entry barriers was not accurate as they were not aware of the taxation policies or they did not take that into consideration. The cost of setting up such malls were high and the company had to pay 25% tax for importing their furniture. This increased their cost significantly as they were required to produce 30% of their furniture in Russia but they managed to make only 13%. This shows that IKEA was short sighted and hasty in making an expansion into a country with political instability, corruption and trade barriers.
Conclusion
The conclusion drawn from the report is that IKEA made major blunders in accessing the external environment. The expansion made in Russia was not at all suitable for the organization and if they wanted to sustain in that market they should have formed partnership with local companies to avoid the political instability and corruption. This shows the significance of external analysis while making an entry into the market.
References
Cavusgil, S.T. and Knight, G. (2015). The born global firm: An entrepreneurial and capabilities perspective on early and rapid internationalization. Journal of International Business Studies, 46(1), pp.3-16.
De Villa, M.A., Rajwani, T. and Lawton, T. (2015). Market entry modes in a multipolar world: Untangling the moderating effect of the political environment. International Business Review, 24(3), pp.419-429.
IKEA (2018) IKEA.com – International homepage, IKEA. Available at: https://www.ikea.com/ (Accessed: 19 April 2018).
Karakaya, F. and Parayitam, S. (2018). Market entry barriers and firm performance: higher-order quadratic interaction effects of capital requirements and firm competence. International Journal of Markets and Business Systems, 3(2), pp.121-140.
Lee, Y.K., Kim, S.H., Seo, M.K. and Hight, S.K. (2015). Market orientation and business performance: Evidence from franchising industry. International Journal of Hospitality Management, 44, pp.28-37.
Theseus.fi (2013) Theseus.fi. Available at: https://www.theseus.fi/bitstream/handle/10024/57983/Kalinina_Daria.pdf?sequence=1&isAllowed=y (Accessed: 19 April 2018).
Theseus.fi (2017) Theseus.fi. Available at: https://www.theseus.fi/bitstream/handle/10024/125542/Alen_Linda.pdf?sequence=1&isAllowed=y (Accessed: 19 April 2018).
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