Pestle of IKEA
Founded by 17-year-old Ingvar Kamprad in the year 1943, IKEA was initially a ready-to-assemble furniture manufacturing company situated in Sweden. In current days the company has marked its presence in 26 countries worldwide operating with the assistance of 298 stores and had employee strength of 139,000. The brand has also entered the Indian furniture marketing industry, which is known for rich traditional handcrafted and artistic wood-worked furniture. In present days, the Indian furniture market has been estimated to be Rs. 700 billion till 2010 and the country’s growing demand for creating stylish urban middle-class furniture makes it the best playground for IKEA India (Narain, 2017). Companies such as “Godrej Interior”, “Home Town” and “Usha Lexus” already occupy the Indian furniture market. However, the global brand IKEA promises to offer global styling furniture with a refined touch is what makes the brand interesting in Indian furniture industry.
The six dimensions of PESTEL analysis has been carried out in the following discussion for IKEA India:
Political:
- Governmental support for Foreign direct investment or FDI helping IKEA to survive in Indian market
- Stable political conditions
Economical:
- Growing Indian GDP of 7%, which is projected to grow 7.4% by 2020 shows good economic conditions to do business in India for IKEA
- Decreasing trend in taxation from 33.99% in 2010 to 30% in the current market reflects higher profit rate for IKEA in the Indian market
Social:
- The huge, diverse culture of India benefiting IKEA India as they have a diverse and customizable product portfolio
- Cheap labour cost is accepted in Indian social culture causing less investment for IKEA India
Technological:
- Advancement in technology causing more acceptance for E-commerce in India which is reflecting in more consumers actively participating in online purchase making IKEA India easy to reach more customers
Environmental:
- The widespread forest of Indian environmental resources assisting the organization to gain stability
- Using plywood material to support the Indian environment
Legal:
- The legal flexibility in India provides a company to operate independently, or limited liability partnership provide IKEA with the flexibility to build a business plan accordingly
- The verity of labour act in India such as “Employee’ State Insurance Act 1948” and “Industrial Dispute Act 1947″disrupting as IKEA has to abide by all the laws
To calculate the competition in the Indian market for IKEA, Porter’s Five Forces method has been taken into account and evaluated below:
Customer’s bargaining power (Medium):
- Customers interested in customized products tend to switch fewer brands causing less bargaining power to them.
- Customer sensitive to the pricing of the product has high bargaining power (Rothaermel, 2015)
Supplier’s bargaining power (Low):
- High level of competition provides less bargaining power to suppliers
- The leverage to switch suppliers in the Indian market is high which restricts the bargaining power of suppliers
The threat of new entrance (Medium):
- The higher economic scale of IKEA India, lowers the threat of new entrains as a new company will offer a higher price than IKEA to gain financial stability
- Low market entry barriers cause a risk factor for IKEA as multiple companies can enter the market at any point in time, making the industry unstable
The threat of substitution (Low):
- Highly diverse product portfolio avoids treat of substitution
Competitive revelry (Medium):
- Rapidly growing industry in India causing industry expansion and new market opening causing less completion to steal market share of competitors
- The competitive pricing strategy of companies making revelry high.
The competitive environment in India for the furniture industry has always been at the higher side as brands such as Godrej Interior and Zuari are present in the market. These companies are doing business management in the industry for a long time and have a holistic overview of the market and customer demands. Pricing factors will not be much of a concerning issue as IKEA India is a financially stable organization which can compete with the market (McNamara and Descubes, 2016). However, the knowledge of acceptance of the product is the key point where IKEA India needs to concentrate. The companies present in the Indian market have been developing products according to customer need for years, and those products are well accepted in the market. Despite having a global brand image, IKEA India is in a highly competitive environment in India which the company is trying to mitigate by employing designers with a wholesome idea of applicable product designing in the market.
According to the Indian market, the opportunity and threats of IKEA India have been described below:
Opportunity:
- The huge potential market in the designing sector
- Low labour cost in a developing country such as India (Kumar and Bansal, 2015)
- Low competition in modern furniture designing in Indian furniture industry
Threats:
- The large fluctuation in stock control
- Rising cost of imported goods due to taxes
- Clashes in diversity vs Imbalance
- Unknown intercompany collaboration
In a broader context, resources are classified under two categories-tangible and intangible resources. Tangible resources comprise of physically visible materials, whereas Intangible resources lack any physical existence. The tangible resources of IKEA comprise cotton, waste materials, and goods, essential for producing finished products (Ahmad and Mohamed, 2018). The various equipment and tools used for making furniture products also fall under the category of tangible resources. Similarly, the human resources department, which is responsible for running company operations, falls under intangible resources. The management, which takes account of employee performance, is also an intangible resource of IKEA, India.
Porter’s Five Forces of IKEA
The company takes active participation in maintaining its designing and model and get its patent right so that whenever the designing is observed by the consumer, he can automatically visualise the image of IKEA products in his mind, thus enhancing the brand loyalty. The flexibility and simplicity of the IKEA policies give them the opportunity for targeting and starting business operations at any place across the globe (Vahlne and Jonsson, 2017). There is no hindrance of complex formality, which results in enhancement of cash flows. The company never compromises with quality, and therefore, customer preference is their primary motive, thus resulting in enhancement of consumer base across the globe.
IKEA takes active participation in emphasising on sustainable profitability by application of the low-cost model of business. This competency allows the company to identify the true costing of particular product and procedure, which is in alignment with the designing, sourcing and operational expenses (Leary, Bell and Thomson, 2017). The company tends to provide quality products at cost-effective prices. The company also prioritises on CSR activities to maintain its corporate reputation in the competitive market. For a generation of low costing savings, IKEA utilises a flat packing procedure, which reflects upon increased merchandise for shipping and storing amongst distribution centres.
According to the Indian market, the strength and weaknesses of IKEA India have been described below:
Strength:
- Increasing demand in modern, clean and minimalist design in the Indian market
- Highly skilled, educated, young, capable and dynamic workforces in India
- Established global branding of IKEA, which can be used as a renowned image of the brand (Tiwari, 2015)
- Divers and customisable product portfolio to meet the need of diverse customer need
Weaknesses
- Fear of sharing intellectual property such as knowledge with a foreign manufacturer
- Slow absorption of innovation in the furniture industry of India
- Lack of quality awareness of the product
The value chain analysis of IKEA reflects upon an analytical framework, which helps in the identification of business activities, that is creating value and competitive beneficiary to the furniture company in the global market. The inbound logistics of IKEA are in alignment with the purchase of raw materials from 1002 nations situated at 51 nations across the globe. The operational department of IKEA is divided into franchise, property and financing divisions respectively, which is the core of its business activities. The company mainly utilises print and advertisement of media, direct marketing, social media and PR events to influence the purchase behaviour of the consumers. While prioritising the consumer services, the company considers the use of online customer service, exchanging of goods depending on authenticity, offer a refund as per necessity and acquire consumer feedback for enhancing the brand value.
Figure: IKEA value chain analysis
Source: (Lebherz and Hartmann, 2017)
IKEA has always emphasized on 4 strategies to make their value proposition most prominent to their customers which have been discussed below:
In the contemporary era, most of the companies follow the trend of globalization. IKEA corporate and business strategies focus on determining its sustainability and competitive advantage amongst the competitor brands so that they can get market share in the Indian market. The idea reflects in the business strategy of the brand while globalizing in India, where IKEA focus on an amalgamation of the joint venture, pricing strategy and localization. Initially, the joint venture of IKEA with local companies in India helps the brand to survive the macro-environmental impact which is the political policies of India. Secondly, the adoption of a localization strategy helps the brand to absorb the local Indian culture for example, IKEA focused on portable furniture as space is a common problem for Indian residents. At the bottom, the pricing strategy gives IKEA the competitive pricing edge. As an example, IKEA sells goods such as single-scat and Ektrop armchair in a cheaper price in India than the United States. The strategies adopted by IKEA have assisted the brand to gain sustainable growth in the Indian market.
Competitive Environment of IKEA
The strategic plan of IKEA includes the use of Ansoff matrix which has been described below:
- Market Penetration:While IKEA tries to sell its existing products to the existing market available in India, it follows specifically market penetration. IKEA focus on selling the existing products available in the Indian market to those who visit the store more.
- New product development:To attract the customers, IKEA has always been a leader by creating and developing the products to address the demands of the customers. IKEA develops and the newest furniture and home decor which has always worked fantastically for the brand in the Indian market.
- Newmarket development:The industry leader IKEA believes in taking their store format on a global scale to develop the market they are going to enter and plans to stick to their basics while doing so. However, for dynamic countries like India, the company has tailored its marketing mix strategies as the customer need varies to develop the market.
- Diversification:IKEA has been the biggest investor in the sector they operate. The characteristics reflect in the Indian market as well as the organization tries to introduce a new conceptual idea of selling food and opening restaurants inside their stores for customer convenience. Thus, the customers have the opportunity to grab a delicious drink or food, while shopping for furniture, which depicts the diversification strategy of the brand.
While doing business in India, the brand focuses on integrating their outlets with online treading to facilitate the customers. Along with this, the company is focusing on exploring different cities in India such as Chennai, Pune, Surat post setting their first shop in Hyderabad. The brand has focused on integrating their business in the Indian market by opening stores, which would be able to provide customers with the touch and feel of the products (Grant, 2016). The initial stage of integration has been performed by IKEA, while the expansion of the same is still pending for above-stated cities.
Diversification is followed by an organization while it sticks to specifically one industry and market while concentrating all of its focus on one business or the business where they are the most dominant. IKEA has mostly stayed in their dominant domain, which is home furniture. Simultaneously, the brand follows diversification using own concept. While in India, service comes after selling the product, IKEA offers the service once the customer has entered the store. IKEA allows customers to access their cafeteria for food while shopping at the store, which enhances the convenience utility.
Mergers and Acquisitions:
Mergers and acquisitions occur when a company is merged with another similar company or acquire a company which either matches its strategic business unit or core businesses. For Ikea India, the company can follow this strategy to merge with few of India’s furniture and home accessories makers to expand into more markets of India.
In accordance to India, IKEA will focus on the exploration of e-commerce store formats for selling its products and services. A three-step retail strategy will be initiated in India. In the first stage, the company will aim to enhance their branding in India through large formatting stores, by prioritising on the touch and feel retail aspects. The second step would involve focusing on e-commerce from the IKEA store. The third step would contribute towards experimentation of new formats. The company has taken into consideration 49 destinations in India where they are planning to open their physical stores. The product varieties and exclusive designs summed up with enhancement of destination shopping will lure the consumers successfully (Carlsson, 2015). The product variety would emphasize space and storage requirements, which is one of the most perceived expectations of Indian consumers. The iconic company is also looking forward to opening tailoring stores across various cities in India. The distribution of products will vary depending on the city it is located. For example, home sizes in Mumbai are bigger in comparison to Hyderabad; therefore, the company will make products according to attaining consumer interest. The company also conducted a survey where it visited 500 homes across India to acquire the viewpoints of consumers. The withstanding of weather and humidity will also be considered regarding IKEA products in the competitive market.
IKEA has a great future ahead provided the company implements aggressive marketing strategies for tapping the Indian market. On a primary note, the company should be more web-based to restrict the costing involved in logistics and transportation. The company needs to arrange sustainable training programs for their consumers so that the employees are aware of the CSR motives. Product customisation could also serve as an effective tool for influencing purchase behaviour of consumers successfully. The company needs to emphasize more on the use of social media analytic tools for enhancing their consumer base.
Reference:
Ahmad, N.A. and Mohamed, R., 2018. Management Control System and Firm performance-Resource Based View Perspective. MAYFEB Journal of Business and Management, 1.
Carlsson, M., 2015. Strategic sourcing and category management: Lessons learned at IKEA. Kogan Page Publishers
Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons
Kumar, P. and Bansal, S., 2015. Swot analysis: what does FDI hold for the Indian retail sector in the 21st century?. International Journal of Research in Management, Economics & Commerce, 5(1)
Leary, P.A., Bell, G.A. and Thomson, E.M., 2017. Exploring Aspects of Strategic Management for a Small Plant Bakery
McNamara, T. and Descubes, I., 2016. Can IKEA adapt its service experience to India?. Emerald Emerging Markets Case Studies, 6(1), pp.1-14
Narain, R., 2017, February. Counteracting the barriers to adoption of mass customization practices in Indian SMEs: A case of the furniture industry. In Advances in Mechanical, Industrial, Automation and Management Systems (AMIAMS), 2017 International Conference on (pp. 48-52). IEEE
Rothaermel, F.T., 2015. Strategic management. McGraw-Hill Education
Tiwari, S., 2015. Standardized marketing strategies: a solution to the global competition? A case study of IKEA in Norway, Sweden, France and China (Master’s thesis, Universitetet I Nordland).
Vahlne, J.E. and Jonsson, A., 2017. Ambidexterity as a dynamic capability in the globalization of the multinational business enterprise (MBE): Case studies of AB Volvo and IKEA. International Business Review, 26(1), pp.57-70
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