Assignment

Analysis of IKEA Entry into India using PESTLE

and OLI Framework

Date of Submission
18th March 2020

Submitted to: Submitted by:

Prof. Leena Ajit Kaushal Chaitanya Sagar – 18PT2-07

INTRODUCTION

IKEA is a Swedish-founded European multinational group that designs and sells ready-
to-assemble furniture, kitchen appliances and home accessories, among other useful
goods and occasionally home services.
Founded in Sweden in 1943 by 17-year-old Ingvar Kamprad, IKEA has been the world's
largest furniture retailer since 2008. According to the Bloomberg Billionaires Index,
as of January 2018, Kamprad was the eighth richest person in the world, with an
estimated net worth of US$58.7 billion.
The business is a private company owned by Inter IKEA Systems B.V. registered in the
Netherlands and controlled by the sons of its founder Ingvar Kamprad. The company is
known for its modernist designs for various types of appliances and furniture, and
its interior design work is often associated with an eco-friendly simplicity. In
addition, the firm is known for its attention to cost control, operational details,
and continuous product development that allowed IKEA to lower its prices by an
average of two to three percent.
As of June 2019, there are 433 IKEA stores operating in 52 countries and in fiscal
year 2018, €38.8 billion (US$44.6 billion) worth of IKEA goods were sold. The IKEA
website contains about 12,000 products and there were over 2.1 billion visitors to
IKEA's websites in the year from September 2015 to August 2016.The company is
responsible for approximately 1% of world commercial-product wood consumption, making
it one of the largest users of wood in the retail sector.

THE IN-STORE EXPERIENCE

IKEA’s immersive customer in-store experience provided by the world wide uniform
appearance of the sprawling buildings & handsomely decorated rooms reminiscent of
movie sets, all showcasing IKEA’s latest catalog items in a way which makes customers
feel both in-home and at home.

Arrows line the floor, indicating that IKEA has designed a ‘vision quest’ for all who
enter. There is much to touch, see, and feel on this journey for customers of every
age group. The cafeteria is strategically placed mid-journey, and a hot dog stand and
a Scandinavian grocery store are found at journey’s end (this is not surprising, as
IKEA’s immersive customer experience builds up an appetite).

IKEA is an inclusive space in that it acknowledges a variety of diverse cultures and

situations. There is quite purposefully “something for everyone” from the minute one
enters the store to the moment one leaves the parking lot. And this transcends
geography, too; with IKEA stores in nearly every corner of the world, Forbes
suggests “there may not be an entity anywhere on the planet that operates in as many
countries as this company does.

PRODUCT PORTFOLIO
Other than pre-assembled furniture, much of IKEA's furniture is designed to
be assembled by the customer [known as Do It Yourself-DIY]. The company claims that
this helps reduce costs and use of packaging by not shipping air.
IKEA contends that it has been a pioneering force in sustainable approaches to mass
consumer culture. Kamprad calls this "democratic design," meaning that the company
applies an integrated approach to manufacturing and design, capturing material
streams and creating manufacturing processes that hold costs and resource use down.
Notable items of IKEA furniture include the Poäng armchair, the Billy bookcase and
the Klippan sofa, all of which have sold by the tens of millions since the late 1970s.

IKEA-INDIA

IKEA had announced its intentions to invest in India in 2012, as it found Indian
market lucrative & with immense growth potential. Refer below Pestle Analysis showing
the market scenario & future scope of India. However because of the FDI norms in
single brand retailing, IKEA has waited for more than six years to open its first
store in India [opened its first store in 2018 in Hyderabad].
IKEA has displayed a prudent, watchful attitude peppered with loads of patience in
starting to do business here, and this will surely help the company skip future
minefields including a haphazard foreign direct investment (FDI) policy and anger
amongst local furniture makers against its arrival. The six-year journey to the first
store anyway shows how IKEA has been able to navigate the early bumps successfully,
by coaxing successive governments into relaxing restrictive policies to suit its own
needs.

IKEA has done lot of changes in its product portfolio, In Store experience & other
things for Indian marker. Given Indians’ dislike of DIY methods, IKEA has put
together an in-house furniture assembly team that will help customers assemble tables,
beds and book cases. DIY furniture is IKEA’s signature, something most of its
customers are happy to do by themselves elsewhere, but not in India.
India relaxed sourcing norms under FDI rules in single-brand retail. This relaxation
allows foreign retailers to delay meeting the mandatory 30 percent local sourcing
norm by five years instead of complying with the norm from day-one. Also, approvals
for single brand FDI proposals have now been put on the automatic route (instead of
having to get government approval each time).
As per the amended rules, single-brand retailers can now set off incremental sourcing
of goods from India for global operations during the initial five years, beginning 1
April of the year of the opening of the first store, against the mandatory sourcing
requirement of 30 percent of purchases from India. After five years, the firms will
have to meet the sourcing norm every year.
This is a significant boost for IKEA – which remains the single largest single brand
FDI proposal to have come to India, waiting in the wings till the sourcing norms were
tweaked to its advantage. On its website though, the Indian arm of IKEA proudly talks
of its presence in the country for 30 years, sourcing many different products for
IKEA stores worldwide. It says “today we source products for approximately €315
million every year, with the aim of doubling it in the next few years to meet our
global and Indian needs. We work with 48 suppliers in India, engaging over 45,000
direct co-workers and approximately 400,000 coworkers in our extended supply chain.”
IKEA is sourcing about a fifth of its global requirements from India as of now.
PESTLE ANALYSIS – INDIA
POLITICAL FACTORS
The political situation in India can be
characterized as stable.
India has a federal republic Democracy,
which comprises political stability with
effective governmental policies.
After 2 decades – government with clear
mandate has been formed.
India has reduced the political interface
in the management of enterprises.
Because of which improvement was observed
in the efficiency and productivity of
businesses.
BJP government has allowed 100 % FDI in
retail sector.
Union Govt. of India has carried out
privatization in several stages, such as,
deregulation, de – reservation, and
disinvestment.
SOCIAL FACTORS
India is a country with different social
beliefs & traditional mindset with is
significantly different from IKEA’s home
country Sweden.
Social changes in a country have a
significant impact on the demand for a
firm’s products, as well as the
availability and willingness of people to
work.
India’s population is aging. From a
total of almost 1.1 billion people, a
31.8% are under 14 years old, 63.1% are
between 15 and 64 years old and a 5.1 %
is over 65 years. Thus, the greatest
percentage of population is the working
population.
Attitude towards work and leisure: Indian
culture differs in terms of leisure days
in comparison with the rest of the world.
As Sunday is considered to be a leisure
ECONOMICAL FACTORS
India has started to move towards a more
industrial policy.
Government reduced the number of
industries under compulsory licensing to
six.
Policy towards foreign capital was
liberalized, and the Foreign Investment
Promotion Board (FIPB) to promote and
channelize foreign investment in India.
India features a well-structured tax
system. There are several different taxes
or mandatory contributions that a
business in India has to make.
These include a corporate income tax,
GST, employee’s state insurance
contribution, dividend tax, property tax,
fuel tax, tax on insurance contracts,
vehicle tax (pollution tax), tax on
interest, income surcharge, education
cess and secondary and higher education
cess.
Tax system in India is considered to be
favorable for a business expansion (KPMG,
2012)
Interest rates: An increase in interest
rates means that investment and expansion
plans are suspended because consumers
have less disposable income to spend on
Luxury items such as wooden furniture.
Low interest rates should have the
opposite effect. With India’s interest
rate as high as 8%, a business expansion
at the present could prove to be
dangerous.
Inflation: Inflation is a prerequisite
day for most of the world, this does not
correspond to the Indian culture.
TECHNOLOGICAL FACTORS
Highly educated skilled & dynamic human
resource is available in India at a
comparatively low labor cost.
Software: The annual growth rate of
India’s software exports has been
consistently over 50 percent since 1991.
More specifically India’s software
industry has grown to 5.4 billion dollars
in the beginning of the 2000’s.
Power Sector: India has a great
percentage of self-sufficiency in terms
of total power energy needs.
The Government of India and its agencies
and institutes have recently developed a
number of plans and strategies involving
power sector technology.
However, furniture industry in which IKEA
is into is having low technology
absorption & slow innovation.
Environmental Factors
Environmental Factors include the weather
and climate change. The general move
towards more environmentally friendly
products and processes is affecting
demand patterns and creating business
opportunities.
Climate: The climate in India with the
long monsoons and the equally long dry
periods creates a challenge which needs
to be met by the organizations.
Infrastructure has to be such that can
make businesses viable in such diverse
climate.
Air pollution: Of the 3 million premature
deaths in the world that occur each year
due to outdoor and indoor air pollution,
the highest number are assessed to occur
in India.
Organizations have to establish internal
regulations and standards in order to
help in the decrease of this ratio.
for an increase in prices. Business costs
will rise for IKEA, in the event of an
inflation growth, as well as the costs of
wear and therefore the menu cost will
increase too.
Furthermore, uncertainty is created in
the decision-making process, because
inflation redistributes money from
lenders to borrowers.
With the Indian inflation rates varying
around 9 and 9.5% such redistribution of
income is likely to take place.
Legal factors
Significant changes have been made in the
legal environment in India which
influence the way in which companies
operate.
Such changes include the disability
discrimination legislation, an increase
in the minimum wage and greater
requirements for firms to recycle.
Lot of new rules & amendments were made
for customer interest protection &
grievance resolution.
In general, legal changes can affect a
firm’s costs and demand.
International Trade regulations:
After 1992 India has started to implement
regulations which strengthen imports and
exports in the country.
Through the foreign trade act, provisions
for further development are made, as well
as routes of collaboration between the
central government and the foreign trade
is established.
IKEA SWOT ANALYSIS
Strength
• Global Brand Image
• Diversified Product Portfolio
• Government Support to the Furniture
Industry Low Labor costs
• Healthy textile and leather
industry
Opportunity
• Huge Market (500 million middle
class)
• Increasing demand for Low Priced
Products
• Growing Ecommerce Increasing
Consumer
• Purchasing Power
Other Factors Impacting IKEA’s Success in India
• Umbrella Branding – Everything under one roof
• Low response time and quality service
• Rising Awareness
• CSR Operations in India
• Media Coverage
COMPETITOR ANALYSIS
Organized Branded Retailers
• Operate branded retail stores in
Prime Locations
• Range of offering
• High Quality, High Price
• Serves High-End and Upper middle-
class customers
Local Unorganized Players
• Operate mom n pop stores
• Basic Designs
• Low Quality, Low Price
• Serves Middle-class and lower
middle-class customers
Weakness
• Standard Products
• Low product Lifespan
• Weak Online Support
• Supplier Management in a developing
nation
Threat
• Low price segment competition from
Walmart
• Recession and Economic Crisis
• Rising Cost of Raw Material
Low-end Braded Retailers
• Operate in shopping malls
• Low quality, Low Price
• Basic Designs
• Serves Middle-class customers
Customized Furniture Makers
• Customized Designs
• High/Low quality
• Depends on customer preferences
• Serves all kinds of customers
• Time consuming
IKEA’s – OLI FRAME WORK

Ownership advantages
IKEA is a giant in the furniture industry. In addition to the company size and
financial power, IKEA developed and/or acquired several resources and capabilities
that enable the company to achieve competitive advantages and to successfully compete
against its rivals worldwide.
These capabilities and resources are important differentiation factors in the
competitive furniture market and can be definitely seen as the company’s ownership
advantage. IKEA’s huge competitive advantage has its source in the strong global
brand that attracts key consumer groups and guarantees the success in further
international expansion.
IKEA successfully combines the specific business model based on low cost strategy and
ideal balance between function, quality, design and price with the company’s vision
“To create a better everyday life for the many people”. This business model and brand
name combined with the experience in product design are successfully shared across
stores in different countries and continents.
In addition, IKEA developed certain capabilities, e.g. codes of conduct,
organizational norms and practices, operation manuals that help the company to manage
its organizational structure and to operate across cultures. For instance, lots of
IKEA’s products are delivered directly from the supplier to IKEA stores to save time
and transport costs.
To exploit economies of scale, the company is practicing bulk buying at cheaper unit
costs. Sourcing raw materials like wood from suppliers located close to the
manufacturing sites also reduces transport costs. Another example is the guideline
called IWAY that is the IKEA Way of Purchasing Home Furnishing Products. This
standard defines the social and environmental requirements that have to be fulfilled
by IKEA’s suppliers. These and other organizational practices and operation manuals
are certainly the company’s owned advantage and part of IKEA’s unique and successful
business model.
Regarding the investment in India, technological know-how to produce ultra-thin
hardboard sheets (sustainable and eco-efficient UT-HDF technology), comparatively
less costly local wood can be seen as IKEA’s ownership advantage.

Location advantages
The main location advantages when investing in India are, the access to natural
resources (wood from central forests as well as from other local timber depot’s)
played a key role in IKEA’s decision to build the factory in this region. Since wood
is the main component for IKEA’s products and transport costs for wood are relatively
high. To save transport costs, wooden boards are produced in the closest proximity to
the furniture manufacturers. Market size and proximity to the future growth and high
population regions (Chhattisgarh, Odisha & Jharkhand forests) were also factors in
favor of Hyderabad. Availability and reasonable pricing of land as well as support of
local authorities were also important motives to locate factory in Hyderabad. In
addition to these advantages, lower labor costs and incentives in the form of land
allotment at subsidy prices are also important motivations attracting IKEA’s FDI in
India.

Internalization advantages
As far as the internalization advantage is concerned, there are a few determinants
that explain IKEA’s decision to integrate the manufacturing of components into the
value chain. One of the benefits of such a solution is gaining strategic control over
technology.
IKEA’s modern Production facility in Telangana has been constructed according to up
to date standards in panel manufacturing and equipped with the latest technology to
produce wooden boards. This enable IKEA to make attempts to set new standards in
lightweight board technology, which can further increase its global competitive
advantage.
Since wooden parts are the main component in IKEA’s products, securing delivery and
quality was the other important reason for internalization of components production.
Internalization enables IKEA to avoid or reduce transaction costs that will occur
when the production will be performed by external parties.
Costs are the crucial factor in IKEA’s strategy. Thus, centralization of the
production of components leads to economies of scale and gives IKEA greater
independence from external component suppliers. This kind of backward integration in
IKEA’s value chain was the preferred option when investing in Hyderabad, in line with
the company’s intention to secure required resources and components for furniture
production.

The main OLI advantages are summarized as:

Ownership Advantages Location Advantages Internalization Advantages

- Global brand
- Successful business model
- Company size and
financial power
- Know-how and experience
in international retail
sector
- Experience in product
design
- Experience in operating
across cultures
- Technological know-how in
UT-HDF area
Access to natural resources
(wood)
- Reduction of transport
costs - Proximity to
furniture manufacturers
- Proximity to growth and
high population markets
- Lower labor costs
- Local Govt incentives
- Good infrastructure
(railroad line)
- Availability of (cheap)
land - Support from local
authorities
Control over technology
- Securing delivery and
quality of components
- Economies of scale
- Cost control
- Independence from
suppliers
- Avoiding / reducing
transaction costs
SUMMARY
There will be a growing demand for branded furniture in India & IKEA can use this
trend to successfully introduce its product. The company should make use of its
strong brand name and recognition as a Scandinavian furniture maker.

IKEA by exploiting the local available cheap natural resources can maintain the cost
leadership strategy also will meet the FDI norm of maintaining local sourcing.

The furniture products IKEA is offering are in line with the growing westernization.
Also, growing GDP per capita will lead to the ability to pay more for a premium
product. IKEA perhaps should consider opening of more stores in India in different
metropolitan suburbs (NCR, Mumbai, Bangalore, Kochi, Chennai etc..)

IKEA should use their exclusivity and their brand name to target the online market
as well & should compete with existing players such as pepper fry etc.. By keeping
prices low IKEA will keep its image of high-quality, low-cost, self-assembled
products.