Expanding IKEA into Saudi Arabia - Case Study Example

• Introduction

This report is written for the purpose of describing the activities of IKEA; the kind of merchandise they deal in and the potential they have to expand into a new market. Specifically, it talks about the UAE branch of IKEA, a company that manufactures furniture, kitchen items and other home accessories, and how it may fair on in case it crosses over with a view to establish a new branch in Saudi Arabia. The findings of this report indicate that the market condition in Saudi Arabia are favourable due to fewer tariffs, political stability, healthy competition, low levels of corruption and an inviting demand-supply gap.

• Company Background

IKEA was founded in 1943 by Ingvar Kamprad, a 17 year old boy in Sweden. The name of the company is an acronym coined out of his name, where he grew up and his home town. Netherlands is the headquarters of this multi-national company that deals in home accessories, furniture and kitchen items. Since 2008, IKEA has been the leading manufacturer and supplier of furniture in the whole world (“IKEA,” 2017).

IKEA is famous for its insistence on modernised designs of furniture, appliances and interior designs. In fact, its interior designs have always been known to take the eco-friendly approach. IKEA owns 400 stores housed in 49 different nations around the world. The company has branches in Konstanz, Japan, Spain, Australia, Singapore, Canada, UK, US, Santo Domingo, Dominican Republic, China, South Korea, Sweden, UAE and Serbia among other countries in the world. Their main products are furniture, kitchen items, houses and flats, retail shopping centres, solar PV systems and family mobile (“IKEA,” 2017).

• Country and Market Analysis

IKEA’s market may expand into Saudi Arabia within a very short period in the future. This conclusion is arrived at after considering several factors as discussed below:

Political stability

Saudi Arabia has experienced political stability for many years. It is only their association with Osama bin Laden that almost brought them problems with the Western World, particularly America. The 9/11 attack on America also brought some tension between the two countries but that has since healed and the country is now politically stable and relates well with the western world and its neighbours (Alkhalisi, 2017). This makes the country very suitable for IKEA.

Free markets

Saudi Arabia has been at the forefront in advocating economic blocs in its neighbourhood. They particularly supported the formation of the Arab customs Union back in 2015 and are currently among the countries supporting the Arab Common Market that is supposed to be up and running by the year 2020. These blocs will effectively pave way for IKEA to thrive (Alkhalisi, 2017).

Corruption Levels

The level of corruption in Saudi Arabia is very low and, therefore, conducive for a new business to do well. In 2011 for example, there was a crackdown on very executive individuals for allegations of money laundering, bribery, extortion and abuse of office. In fact, some of them were members of the royal family and relatives of the former Defence Minister (Reuters, 2017).

Level of Existing competition

The level of competition especially the sector of furniture is very high in Saudi Arabia. This is due to the availability of other companies that provide furniture that is equally good. Among the notable companies providing quality furniture are KARE and Home Centre. The pricing for their products ranges from SR50 to SR4, 000, depending on type and quality (Alkhalisi, 2017). This price range is just similar to what IKEA offers and, therefore, IKEA will be pushed to improve on their quality for the sake of surviving the competition in the market. They also have the advantage of the price being within their range. So, they do not have to change their prices in order to remain competitive.

Meeting the Needs of Customers

There is a very high demand for furniture in Saudi Arabia. Many customers want furniture for their offices, residential places and businesses. The main reason for the rise in the demand of furniture in Saudi Arabia is the ever-growing real estate industry and the recent massive investment in the hospitality industry. Both these industries require different types of furniture and in large numbers. This has been a problem for the local market to satisfy due to their limitation in accessing raw materials and having enough manpower to produce enough for the market (Noor, 2016). Therefore, investors have to outsource furniture in order to fill the ever-expanding demand-supply gap. IKEA design’s its products to satisfy all these needs: residential, hospitality and real estate needs. This factor has an 8/10 probability of marking IKEA successful.

Trade Barriers

Since its joining of the World Trade Organization in 2005, Saudi Arabia has done away with most of its business barriers and has become more accommodating to foreign investors. Currently, foreign industrial investors are free to make their investments and can even trade in goods manufactured in their countries. Wholesalers, retailers and franchisers are at liberty to carry on with their businesses and even form partnerships with citizens of Saudi Arabia. However, their capital requirement is set at SR20 million and they are allowed to retain shares of up to 51%, an amount that can be raised to 75% after three years (“Export.gov,” 2017)). This environment is, therefore, effectively help IKEA to thrive.

Transport Cost

The cost of transport may have gone up between 2011 and 2016 due to the increase in population, inflation and other economic factors. However, it is projected to go down in the next two years as a result of the opening of the Riyadh Metro, a railway system that will connect most of the parts of the country (“Expact.com,” 2017). This will make it easier for investors such as IKEA to easily transport their goods from one part of the country to another. Their customers will also greatly improve the movement of products from the IKEA shops to their homes.

Availability of Suitable Labour Force

Figures released by the General Authority for Statistics indicate that there are enough people that IKEA can use as labour. Their figures indicate that only 13,841,158 out of a total population of 31,742,308 are employed. This means that approximately 10,000,000 people are unemployed. IKEA can take advantage of these people and use them in their company (“General Authority for Statistics,” 2017). Therefore, this factor has a 7/10 chance of helping IKEA thrive.

Inflation Rates

According to the data provided by Statistica (2017), inflation rates are very low in Saudi Arabia. In fact, the rate of inflation went as low as -0.16% this year from 3.51% in 2016. It is however projected to rise to 4.96% in 2018. This will be the highest level of inflation in 7 years. However, this rate is expected to continuously fall up to 2% in 2022 (“Statistica,” 2017). Once this happens, the market will be very favourable for IKEA to establish their business in Saudi Arabia.

• Marketing mix & Staffing policy

The products should be appealing to the local people and must be standardized throughout the country. Considering that Saudi Arabia is an Islamic country, the materials used should be the quality mostly associated with Islam and the writings on them should be in Arabic. Since the cost of transporting the products to different parts of the country will be affordable with the launch of the Riyadh Metro, production will just be done in Riyadh and the products distributed to other parts of the country. With regards to promotion, putting posters near mosques and using the television, especially during the Ramadan period may work very well. Pricing should be based on what already existing companies charge for the same quality of products. Charging higher than current market prices may negatively impact the company’s sales. Lowering the prices slightly below the market prices may in fact be the best option provided it does not lead to losses (“Definition of marketing mix,” 2017).

HRM Staffing Policy

The company should use ethnocentric staffing. This will ensure that people from UAE occupy the most important posts in the company in order to safeguard the interests of the company. It will also ensure that efficiency is not compromised since those in leadership positions understand the policies and mission of the company (“Expact.com,” 2017).

• Market Entry Strategy

Franchising

It makes it easier for a company to break into a new market by using an already established business. However, the investor must make a compromise of certain principles and values to suit the new market. Besides, without proper knowledge of the market, the investor may end up failing terribly (“Expact.com,” 2017).

Direct Exporting

It will make it easier for IKEA to access the foreign market since the agents they will use have enough knowledge of the market. Nevertheless, in case the agents are not reliable or get wrong findings about the market, the business may end up making losses (“Expact.com,” 2017). Despite this possibility, it is one of the most suitable modes of entry for IKEA.

Joint Ventures

This approach faces the risk of being impeded by cultural and managerial differences or the partner can become a big competitor. However, when the shares are 50/50, the partners get a perfect opportunity to understand each other and improve their business (“Expact.com,” 2017).

Buying an Existing Company

This method helps get a quick access to a ready market and makes it easier to bypass restrictions for new companies. Besides, the government does not consider the investor a new business. The downside of this approach is that it is very expensive, especially in cases where the business was doing well (“Expact.com,” 2017).

Licensing

It makes market penetration easier since rights are transferred to another company to run the business. Just like franchising, the lack of enough knowledge of the market may be disastrous (“Expact.com,” 2017).

Direct Investment

This approach has more risks since all the resources and labour are directed into a new market in a new country. The only advantage is that the investor is independent and does not have to quarrel with anybody over the running of the business (“Expact.com,” 2017).

Direct exporting is the best mode for IKEA since the agents help understand the market before the products are exported. The products are kept in stores from where they are taken to the customers upon asking for them. They will be able to export furniture and other products to Saudi Arabia only when they are sure there is a ready market for them.

• Strategy for International Business Operations

Global standardization could be the most appropriate method of making the company globally competitive. This method will work well for IKEA because it has established itself as a brand in other 49 countries. Therefore, using a standard marketing method could help make the people of Saudi Arabia fall in love with IKEA products as is the case in the other countries where they have done well.