Overview of IKEA’s Focus on Low Prices and Innovations

Discuss about the International Business Environments -IKEA.

IKEA is Swedish Company and is one of the world’s largest furniture retailers. The company’s main focus is on marketing products at low prices. IKEA has brought up innovations. For example flat packs which helps in reducing production and transport costs (Johanson & Mattsson, 2015). Another is the “showroom-warehouse” concept which provides reduction in retailing costs. IKEA relies on long term relationship with its suppliers. Currently, IKEA’s supply network is spread across entire world. It has become increasingly complex with time. Its main strategy is to design and purchase products that lead to low production and transportation cost. Along with low cost, other major goals for IKEA are reasonable quality, adequate product functionality and appealing designs (Fragouli, 2016). IKEA depends on the functioning of its entire network of suppliers.

IKEA follow transnational strategy in order to maximize global strategy. The factors like deregulation, economic growth, high disposable income and rising housing market have created opportunity of growth for IKEA (Khamis, 2016).. It is also necessary to understand, its two major markets i.e. Europe and North America have fierce competition in furniture retail industry. There is growing pricing pressure and increasing customer demand environmental awareness. In order to reduce such risks associated with such regions, it is necessary that IKEA considers diversification strategy into other markets efficiently and promptly. By doing this, IKEA can take advantage of opportunities present in the new markets which are no longer present in the old market. IKEA generally follows franchising model to enter into new market. Ukraine, Estonia, Brazil and Vietnam are some regions on IKEA’s expansion radar. There exist both opportunities as well as threats in entering the market. This paper analyzes these regions where IKEA might find success.

Industry Overview

The home furnishing retail sector includes floor coverings, furniture and household textiles .The sale of furniture dominates the global home furnishing retail sector. IKEA has the largest share in this area. In the existing markets, due to slow down of economy, IKEA is facing difficulty of getting new stores and low confidence of consumer. Also the furniture industry is facing a lot of competition from other worldwide players like Tesco, Bed Bath & Beyond, Woolworths, Asda, Federated Department Stores, Homebase, B&Q, Argos, Next and M&S.

The buyers are taken as end-users, and manufacturers of furniture, floor coverings and household textiles as the key suppliers. Retailers of furniture, floor coverings and household textiles are the players of the home furnishing retail sector (McNamara & Descubes, 2016). There is fluctuation in prices in this sector due to increase in competition through economies of scale and by providing value added services to the consumer. In addition to this is the Internet that has helped businesses to enter into new market. It has enabled the consumer to be more informed. This makes difficult for retailer to increase the prices. Customers’ preferences are given importance. The strong reputation is created by Brand Image. Retailers are likely to purchase from multiple domestic and foreign manufacturers, thus reducing dependency on one of the suppliers. Smaller companies generally compete by targeting a particular segment and providing large number of products. However, low cost companies like IKEA, can deliver low profit products to the market and generate enough sales to cover the cost. Logistics is one of the most important aspects in this industry. IKEA’s strong brand image boosts its growth in different markets. In order to expand into international market, it has to carry out different market positioning in different countries.

Brazil

IKEA’s Supply Network and Strategy for Low Cost, Quality, and Design

The North American furniture market is going through tough times; South American market has shown strong growth (Ito & Parker, 2015). IKEA’s first store was opened in Santo Domingo, Dominican Republic. The size of the market and environment of Brazil are lucrative to many international furniture companies. The growth of middle class population acts as an opportunity for potential customers. With increase in internet penetration level in Brazil and consumers’ attention to eco-friendly products is positive sign for IKEA. The consumers who are digitally active spend a significant amount of time on the internet. So IKEA has large opportunity in terms of online marketing and sales. Government policies have increased national minimum wage from 5.57 USD per hour in 2010 to 5.82 USD in 2012 (Sanches & Srisuma, 2018).This has created large consumer base for retail sector. Banks are encouraged to give credits to poor. The amount of consumers that IKEA can target has grown. Brazilian consumers are becoming more aware about the eco-friendly aspects taken care during production and assembly of the products. IKEA is leading company in CSR. When creating their products, IKEA takes the environment into consideration. They make sure that their products must be produced under acceptable working conditions by suppliers responsible for their environment. It focuses on areas such as offering sustainable products and reducing their carbon footprint. IKEA could thus be a great match for the thriving eco-friendly trend in Brazil.

Brazil has very high tax policies for imported goods. It is around 75% of greater FOB cost (Bremann, 2017). There are local competitors like TOK & SLOK which provides tough competition to IKEA. Logistic is another problem in Brazil .The country is big and internal transportation is expensive. There is strong bureaucracy in Brazil. Protectionism is common in this country.

Ukraine

IKEA was planning to enter into Ukraine market. It planned to build a store near Kiev in 2005. However, it was unable to buy land due to disputes with local authorities. Since then, minister of economic development and trade is trying to push IKEA to reconsider the decision of halting the trade with IKEA. He insists on the need to restore investor confidence in the Ukraine. The main obstacle in the path of IKEA is corruption in Ukraine. IKEA is known not to give bribes. This untapped market does not have significant solvency of population. The population is under recovery of economic turmoil.

On the positive side, Ukraine’s position has been improved in the ranking of doing business. The government has also simplified foreign exchange regulations. It could however change the strategy of foreign brand. It is related to regulation of payment when importing goods. It also considers protecting overall rights in Ukraine. Another problems related to Ukraine is, flourished grey market. Here the new brands have to compete with those people who don’t like to pay taxes and VAT (BULAKH, 2017). Another area of concern is not significant number of partners available here who will help to develop the business. The MNC companies like Starbucks and Pizza Hut have faced this issue. It is necessary for the MNCs to develop the local players to understand the market well. There is one issue with the PayPal service, users can only spend money but cannot receive. So in case of return, customers might face issue with online transaction. To develop an optimal business platform, it is necessary to ensure a number of factors: create conditions where there are sufficient warehouses and full operation of payment systems (Melykh, 2015). The main condition for all these brands is minimal risk.

Factors Affecting IKEA’s Growth and Expansion into Brazil and Ukraine

Estonia

Swedish furniture retail giant IKEA is continuing plan to expand in Baltics. The first Baltic location targeted was Lithuanian capital of Vilnius. The store was opened in 2013.The another Baltics area targeted are Estonia and Latvia .The main reason for entrance is sales growth is healthy in Lithuania’s capital city. This allows IKEA to open store in other Baltics country. IKEA attracts shoppers in search for affordable design furniture and accessories from neighboring countries. IKEA still considering its decision because it fears that investment may not repay within a reasonable period of time. The Estonia market is small and has conservative taste of consumers (Smith, 2016).

Earlier IKEA is reported to order Estonian furniture and interior design products. It has signed contract with Estonian companies like Wendre for the supply of items like blanket and pillow. This will provide employment opportunities in Estonian Market. Wendre is one of the key textile suppliers to IKEA. Thus, IKEA in partnership with Wendre can easily flourish in Estonia market. The government is also aligned with the necessary requirements like necessary adjustment to transport infrastructure (Dasc?lu & Dumitra?cu, 2016). It is necessary to have smooth connection with the stores. These stores will provide large employment to people. Coming over to economic overview, there is steady growth of GDP, private consumption expenditure is grown. There is also positive sign of retail sales which has continued to grow in Estonia. According to Ministry of Finance Forecasts, average nominal monthly gross wages in Estonia will grow by more than 5% per annum during 2017-2018.Small local players have capital available , so they would be attracted by favorable investors like IKEA.

Vietnam

IKEA is also interested to expand in Vietnam and Philippines. It already has stores in other Southeast Asian areas like Malaysia, Singapore, Indonesia and Thailand. Vietnam is already producing home wares for IKEA. Many enterprises are outsourcing partners to the company. The main aim of Swedish brand is to dominate the world furniture market. IKEA products have captured interest to the customers of Vietnam through portable channel. Vietnam is one of the ideal destinations for foreign furniture makers. It is the largest wood exporter in the area (Jin & Scheepens, 2016). Wood product export turnover stood very high. This acts as an advantage for Swedish giant. IKEA could be benefited in multiple ways by opening its store in Vietnam and shift part of production there. Vietnam is market of more than 90 million people, thus in foreseeable future IKEA has opportunity to gain more customers. Vietnam has more feminine society so IKEA needs to adapt appropriate strategy to succeed there. Chinese and Vietnamese markets are very similar. So IKEA, when entering Vietnam, can learn from expansion to China. In Vietnam, the young middle class is educated, is aware of western styles and have relatively high income (Narayanan & Steinberg, 2016). The products and services offering suit the demand of target customers. Vietnam does not have any big brand providing furniture. When IKEA moves to this country, it won’t face many competitors.

An Overview of the Home Furnishing Retail Sector and Competition

However, the access to cars in Vietnam is rare. It may disturb distribution system or a solution where customers can take their goods on their vehicles. So IKEA may need to invest on the development of more sophisticated distribution system that provides home delivery. Also Vietnamese customers are sensitive to “Made in China” products. Vietnamese consider the quality of material used.

The following section compares four regions in their political, economic, social, technological, environmental and legal aspects for the retail furniture industry.

Political and Legal Environment

The poverty situation is high in Brazil. The Country is open for foreign direct investment. Labor laws are less favorable to business (Dix-Carneiro, 2018).There are high imports tariff. Ukraine encourages trade and foreign investment. It also has low tax rates. It has high corruption, weak business freedom and property rights. The political environment of Estonia is stable. The communication and transport infrastructure is developed. But logistic cost is high. Vietnam is also political stable country. It attracts more trade due to strategic location. However, it has weak infrastructure (Anton, 2015).

Economic Environment

Brazil has strong exports, rising purchasing power increased investment and high commodity prices which captures investor’s attention. However, the country has high debt. Ukraine has high inflation rate, rising GDP, increasing disposable income, rising discount rate and FDI. It is powerful energy producer. Estonia depends heavily on foreign trade. The economic environment in Estonia is built in a way that local parties can take advantage of globalization (Bennett, 2015). Estonian market is price sensitive and small. Vietnam has account surplus. It has low foreign reserve.

Social Environment

Brazil has high income gap (Fischer & Kassem, 2017). Social status is meaningful for middle class. Also the customers have limited credit options. Ukraine has significant population decline and population aging. Also there is rapid urbanization in Ukraine. .Estonia has lower wage level compared to many other European countries but it is growing. Vietnam has shown increase in household consumption. It is very important to consider cultural dynamics of Vietnam.

Technological Environment

Technological penetration is low in Brazil but is growing, so IKEA can expect online sales and marketing in some time. There is dramatic increase in the usage of internet. The majority of software companies are located in Kyiv. The production processes are less automatic in Estonia but technology is rising. The technological environment in Vietnam is continuously growing. This provides opportunities to many countries.

Environmental Factors

Brazil has dense forest in the northern region like Amazon Basin which can be used for wooden furniture. So IKEA can use this opportunity by maintaining sustainable practices. Ukraine is interested in regional environmental issues (Diez & Zvirgzde, 2016). Vietnam is facing environmental issues and there is weak enforcement of Law on Environment protection and Development (Laurell & Axelfelt, 2014).

1. Threat of new Entrant (High)

 There is lack of brand strength in country. So it is easy for new businesses to enter into the market.

1. Threat of substitutes (Low)

There is no substitute to furniture and floor coverings retail market.

1. Threat of Rivalry (Moderate)

There is large number of retailer of different sizes. The economic downturn has increased the exit barriers.

1. Bargaining power of Buyers (High)

Logistics and Brand Image in the Home Furnishing Retail Sector

There is high competition from local players and also cost of switching is low.

1. Bargaining power of Suppliers (Moderate)

IKEA has network of suppliers. So in all, it does not depend on the single supplier. But if IKEA enters through any strategic alliance than dependency on partner rises up.

1. Threat of new Entrant (Low)

Government has eased the regulation but due to high corruption in the country, the market is less attractive to new entrants

1. Threat of substitutes (Low)

There is no substitute to furniture and floor coverings retail market.

1. Threat of Rivalry (High)

There is large number of local retailers who covered all the segments of furniture market.

1. Bargaining power of Buyers (High)

Consumers have local options available and also cost of switching is low.

1. Bargaining power of Suppliers (Moderate)

IKEA has network of suppliers. So in all, it does not depend on the single supplier. But if IKEA enters through any strategic alliance than dependency on partner rises up.

1. Threat of new Entrant (Moderate)

Government is working on the infrastructure to provide sufficient support to MNC players. So this market can attract many international players.

1. Threat of substitutes (Low)

There is no substitute to furniture and floor coverings retail market.

1. Threat of Rivalry (High)

IKEA is already buying products from Estonian manufactures. This gives them a tough competition from local players.

1. Bargaining power of Buyers (Moderate)

Consumers in Estonia are conservative .So it is necessary for IKEA to strategize product as per customer requirement.

1. Bargaining power of Suppliers (Moderate)

IKEA has network of local suppliers in Estonia. So it is necessary to maintain good relations with these suppliers.

1. Threat of new Entrant (Moderate)

Vietnam culture is similar to that of China, Infrastructure is weak in Vietnam. But due to its strategic location, the market is attractive to business.

1. Threat of substitutes (Low)

There is no substitute to furniture and floor coverings retail market.

1. Threat of Rivalry (Low)

There is not much of competitor in Vietnam

1. Bargaining power of Buyers (High)

Vietnam customers are very sensitive to quality of product. They believe that the quality of IKEA might degrade due to its expansion in different countries.

1. Bargaining power of Suppliers (Low)

IKEA has network of suppliers. So in all, it does not depend on the single supplier.

Brazil society believes that hierarchy should be respected, so power distance exists here. Inequality is acceptable. There is high degree of interdependence among member of society. This makes it collectivist country .So it is necessary for any business to establish a good long term relations with its suppliers. Brazil lies on the middle of scale of Masculinity and Femininity. Brazil has scored high on uncertainty avoidance i.e. it tries to create strong set of rules to avoid uncertainty. Brazil scores as an intermediate in long term orientation dimension. Brazil is indulgent society (Xi, 2016). People are willing to realize their desires and impulses.

Ukraine is very centralized country. There is high discrepancy between less and more powerful people. It acts as status symbol. This behavior is reflected in all business negotiations. Ukraine is collectivist society. Relationships here are very critical in obtaining information and negotiations. Ukraine has low score on Masculinity. Ukraine before going into any business deal, prefer to have context and background verification. Ukrainians feel threatened with ambiguous situations (Kaasa & Varblane, 2016). Ukraine has moderate score on long term orientation. Ukraine is indulgent society. So people here respect their leisure time and gratification of their desire.

Challenges and Opportunities for IKEA in Entering Brazil and Ukraine Markets

Estonia scores low on the dimension of power distance. It is an individualist country. Work situation are driven by task orientation than relationship orientation (Realo & Gelfand, 2015). Many of the companies in Estonia are run by younger generation. Estonians generally do not boast about achievements. This makes them Feminine country. Estonia has high preference on avoiding uncertainty. Sometimes this leads them to avoid innovation. They have high score on long term orientation which makes them to encourage efforts in modern education to prepare for future (Borker, 2015). Estonia is restrained society so they do not put much emphasis on leisure time.

Vietnam has high score on long term orientation and power distance .Vietnam has low score on uncertainty avoidance and individualism (Hughes & Pharino, 2015). On Masculinity scale, it shows that Vietnam is less masculine. So it is necessary that IKEA adopt more feminine strategy in order to succeed there (Nguyen & Robinson, 2015). It is believed that culture of IKEA is full of enthusiasm and togetherness that would fit well in feminine society of Vietnam.

Ikea generally follow franchising model for expansion. It reduces the complexity of logistics. Local partners could help to understand consumer’s behavior. This gives boost to freedom and creativity of local partners (Ang, & Hooi, 2018). However, it is necessary to find trustworthy new local alliance. Another mode of entry which IKEA follows is direct mode .This concept has worked well in European and North American areas. Vietnam is similar to China in many aspects. So it is advised that IKEA follows franchising strategy when entering Vietnam. IKEA’s earlier entry to Baltics region is through franchise model and it was quite successful so for Estonia also it can tie up with Wendre and expands its business. Brazil and Ukraine have local competitors like TOK & SLOK, so again franchising option is better for both. However, in Ukraine it is difficult to find partner. So, company can form joint venture where it can have more control (Prange, 2016).

Conclusion

From above analysis, it has been determined that IKEA is following expansion approach very rigorously. It is targeting multiple markets but after extensive market research. Brazil, Ukraine, Estonia and Vietnam are some potential countries where IKEA expects to see itself in future. Moreover, all these countries are likely to bring this investor onboard. This will boost economy and provide employment to people. So majorly the ball is in IKEA’s hands .It will expand in the market where there are minimal risks and maximum return. For example, the countries like Vietnam which has large population which is more favorable in this case than Estonia which is a small market. From Porter’s 5 force model and PESTLE analysis, it is found that Brazil is having many competitors. Ukraine is highly corrupted, have large number of local competitors. Estonia is small market so may not bring return soon. Estonia is restrained society but it has less power distance. So it gives flexibility to IKEA. However, there is cultural aspect that needs to be given importance in case of Vietnam. There is less number of competitors in Vietnam. The technological aspect is also growing. Brazil, in turn has low internet penetration and it has debt. But purchasing power of consumer is growing. Thus, each country has its own pros and cons. The most favorable country in terms of revenue generation, political stability and growing technological aspect can be Vietnam.

Sustainable Practices and CSR in IKEA’s Operations

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