Ikea Company Analysis - Case Study Example

EXECUTIVE SUMMARY Egypt’s growing furniture industry appears to be very attractive for most of the European furniture companies. In this report, the Egypt situation analysis of Egypt market has been done to reach a conclusion whether this market is suitable for IKEA or not. The industry analysis has been performed to analyse the international environment of Egypt furniture industry and Porter analysis has been performed to determine industry attractiveness. Egypt furniture industry appears to be very attractive for European companies for outsourcing furniture production. PETLE analysis has been conducted to evaluate the external environment of Egypt and its suitability for IKEA. Potential political instability, increasing technological developments, growing economy, increasing modernisation and westernisation and flexible legislative framework are the main findings of PESTLE. Finally, based on internal and external analysis, SWOT has been performed. Based on analysis, it has been recommended to IKEA that Egypt market appears to be an attractive market and SMART marketing objectives have been recommended to the company. TABLE OF CONTENTS EXECUTIVE SUMMARY 1 INTRODUCTION 3 INDUSTRY ANALYSIS 4 Porter’s Five Forces Model 5 EXTERNAL ENVIRONMENT 6 Political Factors 6 Economic Factors 6 Socio-Cultural Factors 7 Technological Factors 8 Legal Factors 8 Environmental Factors 9 SWOT ANALYSIS 9 MARKETING OBJECTIVES 10 CONCLUSION 12 BIBLIOGRAPHY 13 INTRODUCTION IKEA is one of the most reputable and largest furniture brands worldwide. In order to improve competitiveness and to achieve the status of a true global organisation, IKEA has been continuously focusing on its expansion strategy. The aim of this report is to conduct a situation analysis to determine the industry attractiveness and environmental risks and opportunities for IKEA in Egyptian market. INDUSTRY ANALYSIS The structure of Egypt manufacturing sector, 83.91 percent companies are micro companies, 13.75 percent are small companies, 1.78 percent is medium-sized companies and 0.56 percent companies are large companies. On the other hand, in furniture manufacturing industry, 93.26 percent companies are operating at micro level, 6.46 percent are small companies, 0.25 percent is medium-sized and 0.03 percent is large-sized (El-Meehy, 2002). The higher operating costs and increasing international competition among the furniture industries of Europe has increased the trend of furniture outsourcing production. Egyptians furniture industry has become the 10th largest industry of the country from a fragmented and insignificant industry as a result of increasing European manufacturers to outsource production (Oxford Business Group, 2009). The Oxford Business Group report also highlighted that today Egyptian furniture companies are working with various European companies and producing hospitality, corporate and casual furnishings. Porter’s Five Forces Model Forces Furniture Industry of Egypt Bargaining Power of Suppliers High: Few dominant companies, high switching cost, backward integration is difficult Bargaining Power of Buyers Low: Products are not standardised, number of suppliers is low, buyers have high profit margins Threats of New Entrants High: Low cost of capital, easy access to distribution channels Threats of Substitutes Low: High switching cost, less willingness of buyers to substitute Intensity of Rivalry High: Increasing number of companies, low structure of costs, average degree of differentiation and less exist barriers EXTERNAL ENVIRONMENT Political Factors Egypt has maintained political stability however; the economy is still facing many political and socioeconomic challenges (Hamzawy, 2005). The short term political rating of the country is 61.0 (Pri-Centre, 2007). Although Egyptian politics has remained stable in the past years however, political instability risks in Egypt are increasing. According to The Economist Report the change in Egypt is forthcoming because youngsters of the country have grown very impatient for a role and voice (Al Ahram, 2010). With the end of twenty eight years tenure of President Hosni Mubarak there are expectations on the political transition in Egypt. Cook (2009) argues that there is a potential for sharpening political instability in Egypt because of the weakening capacity of Egyptian government to control social, economic and foreign policy challenges. The politicians in Egypt are risk-averse therefore; the tenure of political instability is short term. Economic Factors According to 2009 estimation of GDP of Egypt is $188 billion, annual growth rate is 4.7 percent, per capita GDP is $5650, population (2007 estimation) is 80,335,036 and annual population growth (2007 estimation) is 1.72 percent (United States Department of State, 2010). The short term economic rating of Egypt is 69 (Pri-Centre, 2007). Poverty rate is significantly higher and 78 million people try to make both ends meet and in August 2008, the inflation reached the level of 23.6 percent (News24, 2010). Financial crisis hit the tourism, FDI and remittances sector of Egypt however, the figures of GDP predict that growth of the economy did not stop. According to Reuters report September 2010, the economy of Egypt is growing because of the increasing consumption and FDI and in 2010-2011 the expected growth rate is 6 percent (Al Shorfa, 2010). Socio-Cultural Factors Lifestyle satisfaction1 rating of Egypt is 4.8 out of 8 and Egypt is on 55th number in the world based on this rating and on Lifestyle satisfaction inequality2 Egypt is on number 1 with 3.7 rating (National Master). The increasing modernism in Egyptian society is the result of cultural contact with west, through colonial policies, post-colonial state and internal initiatives of modernisation (Zayed). Family structures in Egypt are very strong and parents influence the decisions of their children. Western culture is more popular in youngsters as compared to old people. Technological Factors Egypt Government and European Union have jointly funded the Industrial Modernisation Centre with a strategic aim to modernise the companies to improve infrastructure and technology and to enhance international competitiveness of companies (Visele, 2006). The export/production ratio of Egypt furniture industry has increased from 3 percent in 2000 to 26 percent in 2009 and one of the major factors which have contributed to this huge rise is the most advance technology (CSIL Milano, 2010). Legal Factors The judicial system of the country is based on European legal concepts, legal code is based on Napoleonic Code and marriage and personal status in based on Islamic Sharia Law (United States Department of State, 2010). The legislation framework of Egypt is not strict and recent improvements have been made to attract foreign investors. The companies planning to enter into furniture industry have to consider the forest policy and legislation. The current forest policy of Egypt has been enforced without any official law and it aims to protect environment, natural condition and international environmental protection legislations (Forestry Department). The overall composite rating of Egypt is 64.9 and the business environment rating is 46.5 (Pri-Centre, 2007). Environmental Factors Egypt has signed the agreements of natural environment protect and is internationally committed to keep a check on the activities of furniture companies (Forestry Department). The furniture companies which are aiming to enter into Egyptian market has to follow the forestry laws and the environmental laws in Egypt are of international standards, therefore, the socially responsible multinational companies will not find much difference. SWOT ANALYSIS Strengths Weaknesses Good history of political stability in Egypt IKEA has already set strict environmental sustainable programs Easy access to resources in Egypt Strong image of IKEA and pre-developed brand awareness in Egyptian market Strong family structures in Egypt and traditional cultural system could conflict with the western appeal of IKEA furniture Unlikely backward integration in Egyptian market Opportunities Threats Growing furniture industry Growing economy, increasing population Growing westernisation and modernism in Egypt Increasing technology and infrastructure Flexible legislature of Egypt to improve business environment Potential of political risks Rising Inflation Cultural conflict would affect the image of IKEA is Egypt market Increasing rivalry both from local and foreign furniture companies MARKETING OBJECTIVES Egypt environment actually offer huge opportunities to IKEA and based on the internal and external environment analysis of Egyptian market, following marketing objectives have been developed for IKEA in Egypt. To establish a strong brand name To establish a strong local customer base and achieving profitable operations To improve the image of IKEA as a global brand rather than an international brand To develop the perception of IKEA as an affordable, innovative and modern furniture retailer in the minds of customers CONCLUSION Based on the situation analysis, it can be concluded that furniture industry of Egypt is a growing industry and offers good opportunities in terms of resources, legislation, customer base and expansion to the local and foreign furniture companies. The risks of political instability are short term but the growing economy, improving legislative framework, development in technology, and increasing modernisation in new generation are the long term prospects for IKEA. Although the company can face many threats however, through internal strengths of the company, threats can be reduced to a great extent. Therefore, Egypt market appears to be an attractive market for IKEA. BIBLIOGRAPHY Al Ahram. (2010, July). At the centre of things. Retrieved October 13, 2010, from http://weekly.ahram.org.eg/2010/1008/eg3.htm Al Shorfa. (2010, October 1). Egypt growth outpacing expectations. Retrieved October 13, 2010, from http://www.al-shorfa.com/cocoon/meii/xhtml/en_GB/newsbriefs/meii/newsbriefs/2010/10/01/newsbrief-08 CSIL Milano. (2010, April). Egypt Furniture Outlook. Retrieved October 14, 2010, from http://www.worldfurnitureonline.com/showPage.php?template=reports&id=81 El-Meehy, T. (2002, March). FURNITURE INDUSTRY IN DAMIETTA. Retrieved October 14, 2010, from http://www.entrust-dmc.com/Publications/FURNITURE%20INDUSTRY%20IN%20DAMIETTA.pdf Forestry Department. (n.d.). CURRENT STATUS OF THE FOREST SECTOR. Retrieved October 14, 2010, from FAO: http://www.fao.org/docrep/004/ab580e/AB580E03.htm Hamzawy, A. (2005, February). The Continued Costs of Political Stagnation in Egypt. Retrieved October 14, 2010, from http://carnegieendowment.org/files/Hamzawy_Final.pdf National Master. (n.d.). EGYPTIAN LIFESTYLE STATS. Retrieved October 14, 2010, from http://www.nationmaster.com/country/eg-egypt/lif-lifestyle News24. (2010, April 6). Political risks to watch in Egypt. Retrieved October 13, 2010, from http://www.news24.com/Africa/News/Political-risks-to-watch-in-Egypt-20100406 Oxford Business Group. (2009). The Report: Egypt 2009. America: Oxford Business Group. Pri-Centre. (2007, February 5). Risk Summary - Egypt. Retrieved October 14, 2010, from http://www.pri-center.com/documents/bmi/bmi_profiles_0307_egypt.pdf United States Department of State. (2010, March 5). Background Note: Egypt. Retrieved October 14, 2010, from http://www.state.gov/r/pa/ei/bgn/5309.htm Visele, N. (2006, February 26). Egypt to Nail Hotel Contract Furniture Deals at Hotel Show Debut. Retrieved October 14, 2010, from http://www.docstoc.com/docs/3795903/EGYPT-TO-NAIL-HOTEL-CONTRACT-FURNITURE-DEALS-AT Zayed, A. A. (n.d.). Reflections on Modernity. Retrieved October 14, 2010, from http://www.anatomie-titus.net/img/gespraechsreihe/Ahmed%20A.%20Zayed_Reflections%20on%20Modernity.pdf Read More