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Home Business Today LBS Case Study July 21, 2013 Story
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Executive Summary: IKEA is known globally for its low prices and
innovatively designed furniture. In China, however, it faced peculiar problems. Its
low-price strategy created confusion among aspirational Chinese consumers
while local competitors copied its designs. This case study analyses how IKEA
adapted its strategies to expand and become profitable in China. It also assesses
some lessons the company learnt in China that might be useful in India, where it
plans to open its first store by 2014 and 25 stores in 10 to 15 years.
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States. The company initially tried to replicate its existing business model and
products in the US. But it had to customize its products based on local needs.
American customers, for instance, demanded bigger beds and bigger closets. IKEA
had to make a number of changes to its marketing strategy in the US. The
challenges it faced in China, however, were far bigger than the ones in the US.
As the company opened more stores from Beijing to Shanghai, the company's
revenue grew rapidly. In 2004, for instance, its China revenue jumped 40 per cent
from the year before. But there was a problem - its local stores were not profitable.
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IKEA identified the strategic challenges and made attempts to overcome them. One
of the main problems for IKEA was that its prices, considered low in Europe and
North America, were higher than the average in China. Prices of furniture made by
local stores were lower as they had access to cheaper labour and raw materials, and
because their design costs were usually nil.
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IKEA built a number of factories in China and increased local sourcing of materials.
While globally 30 per cent of IKEA's range comes from China, about 65 per cent of
the volume sales in the country come from local sourcing. These local factories
resolved the problem of high import taxes in China. The company also started
performing local quality inspections closer to manufacturing to save on repair costs.
Since 2000, IKEA has cut its prices by more than 60 per cent. For instance, the
price of its "Lack" table has dropped to 39 yuan (less than five euros at current
exchange rates) from 120 yuan when IKEA first came to the Chinese market. The
company plans to reduce prices further, helped by mass production and trimming
supply chain costs.
High prices were one of the biggest barriers in China for people to purchase IKEA
products. IKEA's global branding that promises low prices did not work in China
also because western products are seen as aspirational in Asian markets. In this
regard, IKEA's low-price strategy seemed to create confusion among Chinese
consumers.
The company realised this and started targeting the
young middle-class population. This category of
customers has relatively higher incomes, is better
educated and is more aware of western styles. Targeting
this segment helped IKEA project itself as an
aspirational western brand. This was a massive change
The main problem for IKEA
in strategy, as IKEA was targeting the mass market in
was that its prices,
considered low in Europe and other parts of the world.
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Helping them adopt new technologies meant higher cost, which would hurt
business. IKEA decided to stick with low prices to remain in business.
As IKEA prepares to enter India, its China experiences will come in handy. It
understood that in emerging markets, global brands may not replicate their success
using a low-price strategy. There always will be local manufacturers who will have a
lower cost structure.
It is more important what customers think about the
company rather than the other way around.
IKEA wanted to be known as a low-price provider of
durable furniture, while Chinese consumers looked
at IKEA as an aspirational brand. It is likely that
Indian consumers will also look at IKEA in a similar
way.
The company also learnt that emerging economies are not ready for environmentfriendly practices, especially if they result in higher prices.
IKEA, famous for its flat-pack furniture which consumers have to assemble
themselves, realised that understanding the local culture is important - Chinese
people hate the do-it-yourself concept and Indians likely do so even more.
IKEA may face some India-specific challenges such as varying laws in different
states ruled by different political parties. This could make its operations, especially
distribution and logistics, a bit challenging. IKEA already has had to wait a long
time to get permission to open stores in India. The delay in policy-making at the
state level could be even longer.
Indian customer preferences and economic environment are similar to the Chinese
market.
IKEA will likely have hopes of attracting India's urban middle-class buyers who are
keen on decorating their homes with stylish international brands. The company has
learnt that doing business in emerging markets is a different ball game for a
multinational company. IKEA did well to adapt in China, although it took
numerous changes to its strategies and more than 12 years for the company to
become profitable in the Asian nation.
starter, hopelessly
mired in specialinterest politics:Prof
Nirmalya Kumar
are ready to adapt a brand proposition that suits the level of development the
market and consumer perception require.
IKEA is a strong brand that understands that growing globally requires
sacrifices and innovation from global teams, and they are ready to listen,
respect and learn from the local environment. The European headquarters'
excitement to enter new markets with proven best practices is something of the
past, proving that the real shift in the global mindset is to recognise that local
versus global can bring optimum results.
Yelena Zubareva, Regional Marketing Manager, FWS/OEM SHELL
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As Ikea prepares to enter India it could definitely learn from its experience in China. There
is bound to be some similarities in both the markets ( of the two countries) but there will
be dissimilarities as well, specially because of the time gap. Ikea entered China in 1998 ,
more than 15 years ago so Ikea cannot blindly follow the strategy (or strategies) of China
while setting up its operations in India. First lets talk about the similarities that is likely
Pricing: Ikea in all probability would not be able to price its products below the price of
local retailers in India. So it cannot position itself as a low-cost furniture., it will be better
to position itself as an affordable priced product . Ikea will not be able to compete with
local local manufacturers in the low cost segment, specially , with the falling value of the
rupee most Indians will perceive the price as affordable ( or even high ) although it may be
low-priced compared to Europe standards, prices which can be considered low in Europe
can be perceived high in India . Aspiration brand for the middle class and high-incomemiddle-class: Western brands in India will find it difficult to position itself as a low-priced
brand . AirAsia, an airline company of south-east Asia could successfully position itself as a
low-cost airlines but that would not have been possible for a western airline. South-east
Asian company could easily position itself in that segment with aggressive pricing, schemes
and offers. Indians will require modular , functional and adjustable solutions like the
Chinese.
Like in China the apartments in India are small and require space-saving technology and
solutions to save space, instead of king-size beds , large closets , huge cupboard and
wardrobes, Indians will require tailormade solutions for themselves. In fact an Indian may
like personalized products to suit their tastes and apartment sizes. Coming to the
dissimilarity that is likely 1.) When Ikea entered china in 1998 it faced the problems of high
import tax , if it were to enter in China in 2013 it would have found that the taxes have
reduced. Most countries around the world have reduced taxation to encourage
globalization and open market policy . Trade agreements and treaty have also played a role
in taxes coming down even in china which is one of the countries that protected its local
manufacturers from external competition even though the Chinese government has
fiercely supported local production still the taxes now have been reduced considerably
from the 1998 levels. When Ikea enters India in 2013 it will find far friendly taxes which
will allow it to import products which it cannot produce locally in India . To start with Ikea
can have a 80: 20 proportion of imported items, it should gradually try to increase the
share of locally manufactured products from 2% to 70% in the next four years . 2.)
Although India a vast country like China the difference is that of varying cultures and
languages in India . In India Ikea would find different culture and traditions in each and
every state . In china Ikea did not have to adapt to so many varying cultures.
Challenges that are likely to be faced by Ikea in India Ikea will find a cosmopolitan culture
in the cities and metros where it is likely to open its stores first. My neighbour's apartment
may have a completely different layout than mine , my neighbour may be in a nuclear
family while I may be living in a joint family so though we are neighbors we may have
varying needs and tastes it is for this customized solution that in India customers go to the
nearby carpenter to make furniture as per their need and choice people prefer personlised
products rather than a readymade product so Ikea will find it difficult to follow a one-sizefits-all policy in India, alternatively Ikea may try to change consumer behavioral patterns
of customers so companies like Kellogs have patiently tried to invest in changing consumer
behaviour . Kellog for years have tried to educate customers to include cereals in their
breakfast after considerable investment Kellogs has been successful in changing the diet
habits of Indian consumers to include cereal as a breakfast option . 1.) Apart from
unorganized furniture manufacturers, Ikea is going to get some stiff competition from
some organized retailers in the furniture space ., . some of these retailers are backed by
large industry houses and company with deep pockets like Godrej ( Godrej Interio ) and
Future Group ( home town Big Bazaar) because of the relative late entry of Ikea in India it
will find quite a number of competitor in the organized retailing segment, in fact furniture
is one of the sectors where of late there has been a number of entrants in the organized
retailer space, some of these players are established in their business of modular furniture,
some of the names who have entered the furniture retailing space in the last 5 years are:
Godrej Interio , Hometown ( BigBazaar) , Durian, Zuari, Modfurn, StyleSpa , Gautier,
Heritage , Damro , Featherlite , Mobel Furniture , Irony , Neelkamal, Giani, Supreme,
Swagath Moulded, Steelco, Hettich, Featherlite , Estillo , Elegant , etc. to name a few ., . out
of these Neelkamal , Swagath Supreme are essentially producers of plastic furniture which
gives the customer cheap alternative to wooden furniture ., . while irony and steelco are
essentially iron and wrought iron furniture manufacturers .,. featherlite also is in the
category of mould furniture which uses a combination of different material ,. Godrej offers
customers both the options of steel furniture ( for office mainly ) and wooden furniture (
mainly for home use ) ., . some furniture stores like Gautier ( France ) and Fettich (
Germany ) are foreign brands that have started operating in India during the last decade .,
. when a big player like Ikea enters the market there is generally a shake out with takeover ,
merger and acquisitions ., . as a strategy Ikea could acquire some of these brands and use
its network of retail chains to start its operations in India. Ikea could also go into some tie-
ups with few of these retail chain stores as they already have an established footprint in the
country Suggestions ( strategy in India , going forward ) :
SUGGESTION : One of the challenges that Ikea will face in India is regarding the
distribution channels which channel or channels should it adopt? For setting up retail
stores it will face some tough questions ., . should it locate its store in the suburbs or on the
outskirts of the city or within the city ., . if Ikea establishes the stores within the city then
the real estate cost ( rentals etc. ) will drive the price of its products to higher levels ., . on
the other hand if the store location is on the suburbs few customers will visit the stores
because of the transportation problems in the country ., . most cities in India does not have
good connectivity through public transport ., . the road congestions and narrow roads
prevents the customers from using their own vehicles unless otherwise absolutely required.
1.) One of the options of distributing can be the one which has already been discussed
above , Ikea could acquire some established store or enter into a distribution agreement ., .
using the distribution channels of established stores will keep a check on the costs and help
Ikea to keep its price affordable ., . 2.) The second option through which Ikea could retail is
through online retailing ., . apart from its own website , Ikea can use some established
online players in the online retailer segment ., . some online stores like Flipkart ,
Homeshop 1 8 ( Home Shop 18 ) , Snapdeal ( Snap Deal ) , O L X ( Olx.Com ) , Myntra ,
Jabong , Yebhi , Rediff Shopping , Indiatimes ( Times Group ) etc. can be used by Ikea as
its online platform ., . online sales will get increasing important and Ikea should have a
substantial presence in this area ., . 3.) Ikea can go for something completely new ., . a
distribution channel which has not yet been tried by any company ( any furniture retailer )
., . Ikea can go into an agreement with developers in displaying their products in the
apartments which are yet to be sold ., . this type of tie-up will be mutually beneficial for
both Ikea and the developers ., . the developers can attract customers by showing a model
home which is fully furnished ., . customers who purchase the apartment will have the
option to choose from a fully furnished apartment or an unfurnished apartment ., .
furnished apartment is still an alien concept in India ., . here builders hand over an
unfurnished apartment for which the customer has to take the hassles of furnishing it from
scratch ., . to furnish it properly the customer spends another about 1 5 % - 20% of the
property price ( in addition to the price of the apartment ) ., . in addition it is a time taking
process for the customer ., . if the customer finds that it saves time and money to take a
furnished apartment that too from a reputed brand of furniture , the customer would be
interested in that option ., . as of now the customer is put off by furnished apartments as
the furniture is generally from some un-reliable ( or unknown ) manufacturer ., . if the
customer gets product warranty and other services which is reliable then he would be
definitely interested in buying a furnished apartment ., . Ikea can enter into such tie-ups
with top developers of India having presence in more than one state ., . real estate
companies like - Unitech , Dlf ( D L F ) , Parsvanath , Raheja , Hiranandani , Ansal ,
Purvankara , Tata Housing , Godrej Properties , Indiabulls , Merlin Group , Ideal Group
etc. are some of the top most developers in India ., . Ikea can reach its target customers ( a
customer who is buying a new house ) using this way of tie-up with developers ., . it will
cost much more for Ikea to rent retail spaces as distribution channels and display areas ., .
tie-ups with builders ( developers ) will allow Ikea to minimize costs and keep the prices
affordable ., . builders will also be interested if Ikea pass on a percentage of the products
sold ( furnished apartments sold ) ., . Opportunity ( target market ) : As per Merrill lynch
data there are 210000 Indians whose worth is more than a million dollar ., . there are 35
million tax payers in India ., . this is just 3 % of the total population ., . while the scope is
huge in terms of numbers the challenge is to effectively reach the targeted 3% of the
population ., . this 3% is scattered and is not homogeneous ( not homogeneously
distributed ) ., .
Also as per the income tax data there are 42800 Indians who have declared that their
annual income is Rs. 1,00,00,000 /- ( 10 million I N R ) or more ., . These 42800 people
whose annual income is in excess of INR 10 MILLIONS , consist of the wealthy category (
super rich ) ., . Ikea can have a special range of super premium products to target this
category of customers ., . What these figures state undoubtedly is that there is a huge
opportunity and market lying for Ikea in India ., and the market is largely untapped with
only a miniscule of population using branded furniture ( from organized retailers ) ., there
is no short cut to success and no ready made prescription for becoming successful in the
Indian market ., . but we can prescribe a few suggestions which Ikea may find useful while
operating in India : 1.) Innovative approach ( like innovative distribution channel as
discussed above ) ., . 2.) Flexibility ( flexible approach ) ., . 3.) Quick adaptability ( adapt to
the Indian culture and adopt the Indian values ) ., . 4.) Personalised and customised
solutions .,. customised products to suit one's individual needs .,. personalized product to
cater to one's individual requirement ., Hope these approaches will help Ikea to garner a
sizable market share in India and gather momentum in its business operations after
entering India ., . gaining momentum from the beginning is important in a robust market.
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This entire case study helped us to understand importance of local customer needs and
their perception toward your brand.This case study also shown us how the IKEA kept
flexibility in their marketing strategy as per costumer zone making little changes to their
already established product.
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to face street smart local manufacturers who were quick to create similar product at
fraction of the low cost the IKEA provided.the way IKEA observed the local consumers and
targeted audience by projecting itself as a aspirational brand (increase in social presence)
and developing stores at strategic location(to crack the transportation problem) helped
them to win in china without compromising profits.
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