Analysis of Background and Entry Strategy of IKEA - Case Study Example

Export Report part 3, IKEA Name Course Course Instructor Date Table of contents Table of contents 2 Background 3 a.Company Background 3 b.Product profile 4 c.Current Market profile 4 d.Product industry analysis 7 e.SWOT Analysis 7 f.Country Background 8 Entry strategy 8 a.Sales, Profits and Market Penetration 9 b.Pricing Strategies 10 c.Promotion and marketing strategies 10 d.Distribution strategy 11 Recommendation 12 Conclusion 12 References 13 Introduction IKEA is a multinational export company that deals with household products; the company engages in direct export. IKEA is based in the Asia Pacific, North America, Europe, Middle East and Caribbean (Rosenhauer, 2008). The company seeks to expand its markets in Brazil, South Africa and India. The management needs to collect the data that will guide the company in making decision on which will be the most feasible market for the particular product (Hubert, 2000). All the aspects in the market must be considered as each of them will be useful. The statistics collected needs to proper analysis and dissemination so that they may translate into profitability of the products in the perceived optimal market. The optimal market is the one that will ensure that the products are sold at least operating cost as well as involve minimal bureaucracy in the legal requirements (Freenstra, 2003). The collected data will be used to determine this market. Background a. Company Background IKEA was founded by seventeen year-old Ingvar Kamprad in 1943. The company that deals with home furnishing derived its name from the found Ingvar Kamprad Elmtaryd Agunnary (IKEA). The company is famous since it is the world’s largest designer of inexpensive, functional and well designer furniture for home uses (Wagener, 2008). The company has approximately 140 stores in the 29 countries it operates. On average, the company designs 11,000 items which are all listed in its catalogue, around 80 million catalogues are distributed globally each year. Product manufacturing takes place at all the company’s manufacturing facilities. The annual sales for the year 1997 were $5.86 billion; this has been growing at an average rate of 15%. Currently, the company has approximately 36,400 employees (Rosenhauer, 2008). b. Product profile The company sells a variety of household products such as furniture and kitchen supplies (Wagener, 2008). The products that the company sells are modern, stylish, durable and affordable to all. The products are self-assembled with easy to use manual and instructions that anyone can understand. The products offered by IKEA are environmentally sustained; this means that the products are eco friendly and are made from materials that are environmental friendly (Rosenhauer, 2008). c. Current Market profile According to Hubert (2000) for the purpose of coming up with the most feasible market for the product, the management needs to further dissect this information. The data collected in relation to the new market for IKEA is very useful for decision making. To help understand the current market, the collected data will be used in the analysis. Every market indicator will have a value attached to it; 1 will be assigned to the best results while 3 will be assigned to the worst performance. To derive the conclusion, an assumption that the country with the lowest aggregate is perceived to be the most visible. India South Africa Brazil DEMOGRAPHICS Income distribution 2 2 1 Age distribution 2 2 2 Household income 2 2 1 Population size 1 3 2 Population growth 2 3 1 Unemployment % 2 1 3 Human development index 3 2 1 Life cycle stage 2 2 1 Gender 2 2 2 Social class 2 2 2 Life style 2 1 1 ECONOMIC CRITERIA Consumer expenditure 2 2 1 Consumer account balance 2 3 1 GDP and GDP per capita 1 2 3 Inflation % 1 3 2 Currency unit and current value on world markets - - - Exchange rate determination (free or convertible) 3 2 1 INFRASTRUCTURE Internet/Communication skills 2 3 1 Transport 2 2 2 Water and electricity 3 2 1 Investments 2 2 1 LOCAL CONSUMPTION FOR TARGET MARKET Substitutes 2 2 2 Consumption of product (quality) 2 2 1 Current imports of your product category 2 2 2 Per capita consumption of product category 2 1 3 POLITICAL AND LEGAL ENVIRONMENT Corruption perception 1 1 2 Ease of doing business 1 1 1 Economic freedom 1 1 1 Free trade zones - - - Political stability 1 2 1 Tariffs and duties 1 1 1 Aggregate 53 54 41 Based on the above analysis, Brazil has a total of 41 implying that it has the lowest aggregate. Thus, Brazil is deemed feasible based on the assumption that it has the least value. South Africa and India have relatively equal performance. All the three countries are politically stable considering that their political and legal environment have been fairing well. However, India and South Africa have had their population factors perform very poorly. This factor along with economic factors makes Brazil the most favorable (Wagener, 2008). In terms of culture, Brazil tends to adapt the Swedish culture where IKEA patterned its ideology and design philosophy. Further, Brazil is a multi-cultural country with strong Portuguese influences owing to many years of colonization by the latter (World Furniture Online, 2010). d. Product industry analysis There are several substitutes to the furniture that IKEA seeks to offer in the prospect markets the company has decided to set up in. There are established furniture shops within this market that already offer products that are similar to IKEA’s products. The competitors of IKEA offer furniture that is tailored to fit the needs of that particular locality. e. SWOT Analysis The company has an advantage over the competitors as it has an already established brand. IKEA has a very effective cost structure in the industry. This makes the pricing of its products affordable to anyone. IKEA offers a wide range of products to the consumers thus they have the ability to choose what they like (Rosenhauer, 2008). The fact that IKEA is not well known is some areas, it has to put up strategies that will sell the brand to the people of that region and gain some reputation for the company in that particular region. Since the products that IKEA produces are eco-friendly, there are available opportunities for further expansion in the markets that are opening up to environmental sustainability (Kennedy, 2011). f. Country Background The analysis that was carried out helped IKEA to come up with an entry strategy. This included the timing, order of entry and mode of entry. Since IKEA has an already strongly established brand that is known worldwide, IKEA will not have a hard time pre-empting its brand in Brazil. The company decided to use the waterfall approach. This is entering a prospected market or markets in a phase manner (Bandler, 1994). IKEA decided to start with Brazil. This is because the analysis that was carried out showed that Brazil was the most favorable for IKEA to start its operations. Brazil was favored by the economic factors and political stability (Wagener, 2008). Brazil is a developing country, with the market analysis that was reported, the company is guaranteed of free cash-flow and increasing profits over time as there is fast growth of the country’s economy (Kieso, Weygandt & Warfield, 2007). The prospect of the growth of IKEA is guaranteed in all the regions as they are developing countries. This is because there is rapid increase in the demand for the product; the demand will rapidly grow each day. Entry strategy The scale of entry that IKEA decided to use is starting on a smaller scale. This was the best option as the company will have minimized on the investment risk (Hubert, 2000). IKEA plans to increase the scale slowly as the company gets more familiar with the regions market. Using this scale of entry reduces the percentage of losses that the company may face incase the company does not take off as expected (Wagener, 2008). It is important for IKEA to consider the market analysis that was carried out as this would determine the success and profitability of the company. A country market analysis is important as one will be able to determine the consumer target for the company’s products and services (Martinez & Jarillo, 1991). With an understanding of the market analysis for Brazil, India and South Africa, IKEA will be guaranteed of the highest profit margin which will lead to a high free cash flow. a. Sales, Profits and Market Penetration For IKEA to successfully penetrate the targeted markets, the company has to first incorporate a culture strategy. The importance of this is to understand its targeted consumer and its consumer habits (Freenstra, 2003). With this understanding, the company will be able to penetrate the market without facing many obstacles as it will come up with suitable strategies for each of the three regions. These strategies will vary depending on the different consumer habits of each market (Page, 2003). The common factor that was noticeable in all the regions is that there is a big gap between the social classes in the region. Most of the people cannot afford to buy luxurious furniture. For this fact, the company decided that it will export furniture that can be sold to all social classes. This means that the company has increased its target consumers. IKEA will sell furniture that is luxurious for those that want luxurious furniture and normal furniture for those that need furniture that is a basic need. This way, IKEA can offer a wider range of products thus increasing its consumer target and in turn the company makes more profits (Wagener, 2008). b. Pricing Strategies IKEA had to come up with an exchange rate strategy. This is important as the company wants to operate at a minimum cost and still let the products be cost effective and affordable to all the consumers. The company has to decide what currency to use in marketing. The most appropriate and less complicated way to do this is by using the home country’s currency (Kennedy, 2011). There are risks that are involved in international trade. These problems may arise due to the foreign exchange rates. IKEA has come up with measures to deal with that. One of the measures is using forward contracts and futures. The contract allows the company to acquire the products at predetermined prices. In the futures, the channels either the wholesaler or retailers sell or buy the products at the agreed price. This way the price has been fixed and this makes sure that the company will not be affected by any future fluctuation in the product price. The futures are official contracts while the forward contracts are informal agreements between the seller and buyer (Bandler, 1994). c. Promotion and marketing strategies The advertising and marketing will be done for the first quarter of the entry. The advertising and marketing will be done through the media and social media. Adverts will be placed on TV, news paper, the radio as well as interactive social media. The strategy will include having an introductory pricing. This will require a good price that will attract the customers. The adverts will include product description in details and the common features among all products that IKEA is selling. Advertising is important as it creates awareness about the product (Freenstra, 2003). The advertising cost will eventually reduce as the company gets established. d. Distribution strategy There are few things that have to be considered while deciding on what distribution strategy to follow. Firstly, the location should matter a lot (Hubert, 2000). IKEA has to be established in a place where its targeted consumers easily access without any difficulty. The place also has to be conducive for IKEA. Since IKEA wants to maximize on profits and reduce on cost; the company will incorporate the Vertical Marketing Strategy (VMS) to deal with the distribution strategy (Hopkins, 1996). IKEA settled for the corporate Vertical Marketing Strategy. This is because the company is dealing with all the transactions. There are different channels that IKEA will use but at the entry time, the company will transact directly with the consumer. At the later stages of the growth of the company, IKEA will incorporate other channels so as to increase profits. The other channels that the company will incorporate are: IKEA will supply the furniture then the consumers will get the product from the retailer. After completing establishing IKEA in these regions, the company will then use distributors to wholesaler who will in turn distribute to retailers and the consumers can purchase the products from the retailer. At this stage, the company will still sell the product to the consumer directly. Figure 2 shows the channels (Hubert, 2000). Selling directly to consumers Selling through retailers Selling through wholesalers Recommendation The marketing strategies that a company chooses to us in a new market are influenced by the country’s market analysis, the culture of the people and an understanding of the consumer habit in that region (Steel, 1998). The strategies that will be set up for the entry and the establishment of IKEA in Brazil, India and South Africa will determine whether the company will succeed or not. Although the strategies will also depend on the countries cultural and consumer research that will be done. Having a competitive edge over the competitors that are established in that market is crucial when setting up a business in a new region. Conclusion Entering a new foreign market has never been easy. In order to make the entry easy, a company has to undergo through all the preliminaries required. Researching on the new market is a major aspect to follow. This entails thorough analysis of the market to determine its feasibility. The research process helps to ascertain the possible challenges to be faced so as to get prepared. A company should further be prepared to market its products; this calls for adequate funds to employ effective marketing strategies to ensure that the product gets into the market as fast as possible. References Bandler, J. (1994). How to Use Financial Statements: A Guide to Understanding the Numbers. NewYork, NY: McGraw-Hill. Freenstra, R.C.(2003). Advanced International Trade: Theory and Evidence. New Jersey: Princeton University Press. Hopkins, C.C. (1996). My Life in Advertising and Scientific Research. New York: McGraw- Hill. Hubert, C. (2000). Knowledge Management: A Guide for Your Journey to Best-Practice Processes. Houston, TX: American Productivity Center. Kennedy, S.D. (2011). The Ultimate Sales Letter: Attract New Customers, Boost your sales. Avon, MA: Adams Media Kieso, D.E., Weygandt, J.J., & Warfield, T.D. (2007). Intermediate Accounting, 12th Edition. New York: Wiley. Martinez, J., & Jarillo, J. (1991). Coordination demands of international strategies. Journal of International Business Studies 22, 429–444. Page, R. (2003). Hope is Not a Strategy: The 6 Keys to Winning the Complex Sale. New York: McGrawHill. Rosenhauer, S. (2008). “Profit is a wonderful Word”: IKEA’s Strategy behind the Profit. New York: GRIN Verlag. Steel, J. (1998).Truth, Lies and Advertising: The Art of Account Planning. New York: Wiley. Wagener, D. (2008). IKEA: competences and capabilities. New York: GRIN Verlag. World Furniture Online (2010). Furniture Outlook: Brazil. Retrieved from: http://www.worldfurnitureonline.com/showPage.php?template=reports&id=92&masterPa ge=report-countries.html. Accessed on 3 November, 2012. Read More