The Furniture Sector in Pakistan - Case Study Example

The Furniture Sector in Pakistan EXECUTIVE SUMMARY IKEA appears to be the world’s major furniture brand. The company is currently focusing on international expansion strategy and it has established 316 stores in many world markets. IKEA has entered into China, Japan and Singapore and company is currently considering entering into Indian market. Pakistan furniture industry also appears to be a good option for IKEA. In this report, the marketing plan of IKEA to enter into the Pakistani market has been presented. The external environment analysis shows that IKEA can find huge opportunities in the Pakistan furniture industry as currently no international furniture brand is operating in the country. Although economy of Pakistan is threatened by unstable political conditions, terrorism and weak economic conditions still, the changing patterns of people and their preference for western furniture products over weigh these threats. Porter’s five forces analyses show that furniture industry of Pakistan is a highly attractive industry. The market audit shows the strengths of IKEA which can help the company to ensure a successful presence in the Pakistani market. After identifying the corporate and marketing objectives of IKEA, this report also describes a preliminary marketing plan to enter into the market. Direct investment strategy has been considered as the most suitable strategy for IKEA to enter into the industry. The report also describes the marketing mix of IKEA. The company will keep its IKEA concept to promote its products and services in Pakistan. INTRODUCTION TO PRODUCT Ingvar Kamprad Elmtaryd Agunnaryd (IKEA) is a Swedish company. From 1954 to 2010, the number of stores of IKEA has grown from 1 to 316 stores (http://franchisor.ikea.com/showContent.asp?swfId=facts1). The company has been developed to offer low price and modern home furnishings to the consumers. Unlike other home furnishing retailers, IKEA focuses on providing a combination of low price and good design and functionality to the consumers which never goes out of fashion. Today, the company is printing its catalogue in 25 languages and circulate in 35 countries around the world (http://franchisor.ikea.com/showContent.asp?swfId=catalogue9). Moreover, the stores of IKEA attract around 600 million visitors (http://franchisor.ikea.com/showContent.asp?swfId=store9). IKEA is currently targeting countries from Europe, North America, Australia, Asia Pacific and Caribbean. In Asia Pacific, company has been able to enter into China, Hong Kong, Japan, Malaysia, Taiwan and Singapore. In this report, the marketing plan of IKEA to enter into the Pakistani market has been presented. Pakistan appears to be an attractive market for IKEA because the westernisation in Pakistan is increasing very rapidly and people are seeking to import western clothes, home furnishings and other products. Therefore, in this report, the plan of establishing IKEA store in Pakistan has been presented. The store will initially offer home furniture products in Pakistan. ENVIRONMENT ANALYSIS PESTLE Analysis Political Pakistan is facing high political instability which influences both the consumers and businesses. The decline of exports of furniture since 2007 is because of the political and economic problems especially load shedding (Arifeen, 2010). However, direct political influence is very less on furniture retailers. Government has very weak regulatory control in the furniture industry because of the presence of a number of furniture retailers. Therefore, international companies usually consider weak regulatory influence of government very favourable for doing business as they make decisions more independently. IKEA has always been facing strict regulatory framework because it is operating in various world markets therefore, IKEA will not face any political challenges however; the unstable political conditions can influence the operations of IKEA. Economic Developing states are considered as the perfect place for the furniture manufacturers in the world. Most of the international furniture retail chains and buying groups have found significant and cost-slashing and earning opportunities in outsourcing labour-intensive furniture manufacturing in developing states (International Trade Centre, 2007). Similarly, Pakistan has expanded its furniture manufacturing capacity and government support and tax breaks have also contributed to attract international furniture manufacturers and retailers. Swedwood is sourcing the manufacturing of furniture to IKEA therefore; IKEA may not currently shift its production capacity in Pakistan however, after establishing its presence, it can look into such opportunities in future. Social The living patterns of consumers in Pakistan are changing and people are getting more western-style oriented (Muhammad, 2010). The foreign brands have stepped into many of the industries including furniture industry. Purchasing power of consumers has increased as a result of increase in per capita income from $736 in 2005 to $1051 in 2010 (Ali, 2010). Per Capita Income in Pakistan – From 2004-2010 Source: Einfopedia Technological In Pakistan, hand-carved furniture is in demand and it seems to be most popular in furniture industry of Pakistan. However, in the furniture industry, different levels of mechanisation exist and on all these levels, Pakistan is considered to be on average (International Trade Centre, 2007). On the other hand, the furniture retail industry is less technology-intensive and more labour-intensive. Moreover, because of the small scale operations of many small retailers, the technological orientation of retailers is very low in furniture retailing. Legal The annual deforestation rate in Pakistan is 2 percent and only 2.5 percent land in Pakistan is forested and according to the government report in 2006, if the current rate of consumption of timber persists, then timber will be vanished within next 15 years. Such concerns have increased the focus of government on environmental laws related to furniture industry, therefore, like furniture manufacturers, the furniture retailers in Pakistan are also facing strict laws and regulations. On the other hand, the critics are raising the concerns that government and the local authorities pay little attention in combating the problems related to environment laws in furniture industry (Illegal-logging info). In Pakistan there is no official quality standard for domestic furniture products. Environmental Pakistan furniture manufacturers and retailers are encouraged to follow environmental laws however, because of the weak regulatory system in the country; companies are not focusing on environmental laws. IKEA being an international furniture retailer can develop a strong image by following environmental laws and regulations. Porter’s Five Forces Model Threats of new entry The barriers to entry in Pakistan furniture retailing industry are very low because economies of scale in research and development, production and marketing are very low. Because of low economies of scale thousands of retailers are operating in Pakistan furniture industry. Second, the product differentiation is very high which enhances the competitive advantage for new entrants. Third, low capital requirements to enter into the industry further encourage the new entrants. IKEA can face significant competition in overall furniture retailing however, no major competitor dealing in modern furniture exists in the market. Bargaining power of suppliers Bargaining power of suppliers is low because of the presence of a number of raw material suppliers in furniture industry. However, because of increasing deforestation, the bargaining power of suppliers is increasing and it is expected to increase further in future. Many of the big furniture companies are importing raw material from international markets which further enhance the bargaining power of buyers. IKEA will source its furniture from Swedwood therefore; company is not threatened by increasing bargaining power of suppliers. Bargaining power of buyers The bargaining power of buyers is high in furniture retailing industry. The switching costs in furniture industry are very low because of the availability of huge variety of furniture in the market. On the other hand, product differentiation is moderate which further contributes to increasing bargaining power of buyers. In the case of IKEA, the bargaining power of buyers will not be high because there is no major western furniture brand in the market and most of the western furniture available in the market is imported by the domestic furniture retailers. Threat of substitute The threat of substitute is significantly high because of the presence of different categories of furniture. Moreover, the low switching costs of furniture products further enhance the threat of substitutes. Intensity of rivalry among existing competitors High rivalry exists in the furniture industry because of the presence of a number of small companies and saturated market. The industry growth is high which further attracts new entrants and encouraging the firms to expand their manufacturing capacities. Additionally, low switching costs and low entry and exit barriers have also enhanced the intensity of rivalry among competitors. Therefore, Pakistan furniture industry appears to be a very attractive industry because of low entry barriers, low bargaining powers of suppliers, high industry growth and changing trends in the furniture industry. MARKETING AUDIT AND PLAN SWOT Analysis Strengths International brand recognition and strong image in the world furniture industry High financial stability Low cost of production offers company to keep the prices low Existing presence in the Asian markets First move advantage in Pakistani market Weaknesses Association of IKEA with modern furniture business reduces its capability to target other furniture styles in Pakistan The market demanding modern and Scandinavian style furniture is very small Opportunities The orientation of Pakistani consumers towards western furniture trends and fashion is increasing in Pakistan. Presently, no international furniture retailer is operating in Rawalpindi and Islamabad however, many domestic retailers import furniture from international markets. Cheap labour is available and production capacity is expanding which offers IKEA an opportunity to establish its manufacturing plant in Pakistan in future. Further diversification opportunities on other markets such as food industry. Threats High political instability in Pakistan Threats of terrorism and frequent terrorism incidents in Islamabad Weak government regulatory control can encourage the competitors to indulge in unfair means of competition. Corporate and Marketing Objectives The assumed corporate objective of IKEA is to further expand to the international market especially the Asian economies which the company is not currently targeting. IKEA is currently planning to enter into Indian market and company has already established its presence in China, Japan and Singapore, therefore, entering into Pakistan appears to be a next feasible strategic objective for the company. The marketing objectives of IKEA in Pakistan are given below: To attain market shares of at least 25 percent in the western furniture retailing sector in the first years of operations. To encourage sales to achieve the break-even profit after six months of operations. To increase the awareness of consumers towards IKEA Concept. To keep the target market updated about the recent trends in the international furniture industry and to penetrate the western furniture into the Pakistani furniture industry. Segmentation To segment the Pakistan furniture market, two strategies will be used including the demographic segmentation strategy and behavioural segmentation strategy. The three selected demographic variables are geographical location and gender. The geography of Pakistan can be divided into six regions including Punjab, Sind, Baluchistan, Islamabad, Khyber Pakhtoonkhwa and FATA and population can be targeted based on the geographical regions. The given table shows the population of different regions of Pakistan. Table: Population in Millions by Province Source: MOPW Website The population of all geographical regions when segmented based on gender; three categories are achieved including men, women and kids. For example, if the outlet of IKEA in Islamabad targets population of Islamabad, the total population is 1.33 million. This population can be segmented based on gender. In the behavioural segmentation strategy, the consumers can be segmented based on their preference for specific furniture style, usage and benefits sought. Four main styles of furniture are famous among the consumers in Pakistan including antique style furniture, mughal furniture, modern or Italian furniture and oriental furniture. Second, what kind of benefits a customer can seek while buying or opting the furniture products such as low cost, durability, functionality etc. Third, furniture market can be segmented based on usage of furniture. The market can be segmented into three categories; first, household furniture; second, institutional furniture for schools, hospitals etc and contract furniture for banks, hotels, shops etc. Targeting The target group of IKEA in Pakistan has been selected based on IKEA concept. Initially, the geographic segment that will be target by the company is Islamabad; however, residents of Rawalpindi also appear to be a potential target market for the company. Islamabad and Rawalpindi are the twin cities. Therefore, both the population of Islamabad and Rawalpindi (twin cities) appear to be the target market for IKEA. Although IKEA will not offer the products based on gender or age group however, as company is targeting the kids segment therefore, considering this segmentation variable was important. In the behavioural segments, IKEA will target the consumers the people preferring modern furniture style. The brand will target only the household furniture segment. Moreover, company will attract the consumers seeking modern and functional furniture designs at reasonable costs. Positioning IKEA Concept of low cost and modern design and functionality will be adopted to position the company in Pakistani market. To launch IKEA in Pakistan, products benefits and features positioning strategy will be adopted. Through this strategy, the company will promote the features of IKEA’s products which make the products distinct in Pakistan furniture industry. Market Entry The company can pursue different strategies to enter into the Pakistani market. If company pursues a direct investment strategy to enter into furniture industry of Pakistan, it can either opt for a joint-venture or it can establish a wholly-owned subsidiary. If IKEA, opts for a joint venture, IKEA can either fully integrate or it can integrate few of its functions including marketing and distribution functions. On the other hand, if the company chooses to establish a wholly-owned subsidiary for marketing and distribution only or it can fully integrate. Another marketing strategy second strategy which can be pursued by IKEA is the Transactions strategy, through which company can make different categories of export transactions (Grant, 2005). The selected strategy for IKEA to enter into Pakistan furniture industry is the direct investment strategy. In this market entry strategy, IKEA will establish its wholly-owned subsidiary in Pakistan. As company has already established its stores in Singapore, China and Japan therefore; starting a sales and marketing outlet in Pakistan will be a part of further international expansion in the Asian market. IKEA is already expanding its stores throughout the world and number of IKEA stores is increasing every year. The company has established a strong franchise system and generated millions of pounds from franchise fees however, as company is new to the Pakistani market therefore, to enhance the control in the start and to keep the corporate image of the company consistent throughout the world, it will be a wholly-owned outlet of IKEA. Marketing Mix Product IKEA is dealing in modern home furnishing business however; the outlet in Pakistan will exclusively deal with furniture line and a few furnishing products of IKEA. The furniture categories that will be available at the outlet include Bedroom furniture, living room furniture, Kids’ furniture and Kitchen furniture. The major products will be beds and sofas. In the living room category, the products that will be offered include sofas and armchairs, textiles, living room storage, lighting, coffee and side tables, TV and media solutions and textiles. In the bed room category, the products will include beds, mattresses, bedroom storage, textiles, lighting, mirrors and related products. In the kitchen category, the products that will be offered include appliances, built-in kitchens, free standing kitchens, work tops, kitchen integrated lighting, sinks & mixer taps and kitchen islands and trolleys. In the kids’ category, the stylish children’s room furniture will be offered. Price The company will offer the penetration pricing strategy (Paley, 2006). In this pricing strategy, the products will be available at reasonable rates in the market. By pursuing this pricing strategy, IKEA aims to ensure a successful marketing entry and expand its market shares in the Pakistani market. This pricing strategy is suitable for the company because IKEA products are considered as low cost products in the world markets and this pricing strategy goes with the image of IKEA. Second, by pursuing this strategy, IKEA can develop a quick foothold in the specific market. Third, furniture industry in Pakistan is a competitive industry however, the market for imported and western business is unsaturated therefore; existing competitors are not expected to react to the prices. In Pakistan many small and large furniture retailers exist and they offer low cost furniture to consumers. Place IKEA will develop its own distribution capabilities in Pakistan to provide high quality services to its customers. The products of IKEA will be exclusively available on the outlet of IKEA. The company will establish its first outlet in Islamabad, the capital city of Pakistan. Islamabad is the hub of foreign offices, international businesses and foreign communities in Pakistan; therefore, by establishing an outlet of IKEA in Islamabad, the company can target both the Pakistani nationals and foreign nationals. Since the aim of the company is to make the products available near its target market therefore, the outlet will be opened in Jinnah Super, F/7-2, which is a commercial area and a hub of most of the international brands. In the beginning the company will only establish one outlet in Islamabad and after a few months the company will plan to expand its outlet to the other cities such as Rawalpindi, Lahore, and Karachi etc. The physical outlet of IKEA in Islamabad will be the only outlet where all products of IKEA will be available. The sales staff will be hired from the local market including, the manager of the outlets and salespersons. The store of IKEA will be built in a commercial shop that will be taken on rent. The physical outlet of IKEA will be a reflection of western culture and atmosphere. The indoor store will be having a brighter look. Promotion IKEA has already established a strong image in the Pakistani market as most of the IKEA products are being imported by domestic retailers in Pakistan. However, to achieve the defined marketing objectives, an integrated marketing communication approach will be used. The tools of integrated marketing communication approach that will be used include public relations, media advertising, sales promotion, interactive advertising, place advertising, direct response, and personal selling. The ads of IKEA will be broadcasted on radio and print media. For the promotion of IKEA products radio and newspaper will be used. Radio and newspaper appear to be the two major media channels in Pakistan. IKEA will not pursue the television advertising strategy as it is very costly. In place advertising, the outdoor printing will be pursued and the most effective outdoor advertising in Pakistan is billboard advertising. All forms of media selected for IKEA has been selected based on their costs and the selected newspaper is Dawn, the national newspaper and radio channel is FM89. IKEA will also use direct flyers for direct marketing and the flyers will be circulated on roads. Online advertizing will be used by promoting the products available in Pakistan on the website of the company. In addition, the social media networking will be also used and Facebook has become one of the best ways of social media advertising in Pakistan. All tools of integrated marketing communication will be aimed to promote a consistent IKEA image and concept. The ads will be targeting the household people, kids and people looking for modern western furniture designs. The table shows the total budget allocated for each tool of integrated communication marketing. These figures have been taken from the official websites of the respective companies. The total estimated budget for advertising in newspaper is £3,172 and the selected newspaper is Dawn. It has been estimated that ad of IKEA will be published in the Dawn newspaper at a cost of £61 or Rs. 8424 for one day ad and for 52 weeks, the total cost is £3,172 (http://archives.dawn.com/fixed/adv/quatpg-w.htm). The estimated budget for Radio advertising is £3,172 and select station is FM-89 which is very popular among the residents of Islamabad and Rawalpindi. The radio channel FM-89 is currently offering the packages of Xtreme, Volatile and Buzz Break, based on the time bands. The suitable package for IKEA is Xtreme package which will cost the company around Rs. 6,300 or £46 per minute (http://www.cityfm89.com/website/Advertising.aspx). Outdoor advertising is expensive in Islamabad as compared to Rawalpindi however, as the company will target both the audience of Rawalpindi and Islamabad therefore, billboards will be placed between Rawalpindi and Islamabad. The total allocated budget for billboards is around £50,724 for 52weeks. The allocated cost of fliers is £1,000 and the cost of sales promotion and personal selling is £1,000 annual. Therefore, the total estimated promotional budget for IKEA in Pakistan is £48,064 for one year; however, because of high inflationary pressures in Pakistan, the rates can be changed. While converting the rupee value of advertising into pounds, an exchange rate of Rupee to British Pound of 138 Pakistan Rupee/1 Pound has been assumed. Bibliography Ali, M 2010, Per capita income of Pakistan, viewed 7 March, 2011, < http://www.einfopedia.com/per-capita-income-of-pakistan.php>. Arifeen, M 2010, Prospects and fears for Pakistan’s furniture industry, viewed 7 March, 2011, < http://tribune.com.pk/story/19304/prospects-and-fears-for-pakistans-furniture-industry/>. CityFM89 2010, Advertising, viewed 24 February, 2011, . Dawn 2011, Advertising rates, viewed 24 February, 2011, < http://archives.dawn.com/fixed/adv/quatpg-w.htm >. Franchisor.ikea.com, Facts & figures, viewed 7 March, 2011, . Grant, RM 2005, Contemprary strategy analysis, Edition 5. Wiley Blackwell. United States Illegal-logging info, Pakistan, viewed 8 March, 2011, . International Trade Centre 2007, The furniture sector in Pakistan, viewed 7 March, 2011, . MOPW 2011, Population by Province, viewed 25 February, 2011, . Muhammad, G 2010, Tatoos culture in Pakistan, viewed 7 March, 2011, . Paley, N 2006, The manager’s guide to competitive marketing strategies, Edition 3, Thorogood Publishing, London. Read More