Expansion of IKEA in Indonesian Market - Essay Example

? Expansion of IKEA in Indonesian Market Table of Contents Table of Contents 2 Introduction 3 Aim and Objective 3 Business Background of IKEA 3 Business Operation of IKEA- International Context 4 Business Operation of IKEA- Asian Context 4 International Expansion Strategies of IKEA 5 Macro Environment and Marketing Environment 5 Environment Issues 6 Cultural Issues 6 Trading Conditions 7 Marketing Environment 8 International Marketing Mix for IKEA 8 Customer Segmentation 8 Brand 10 Product & Price 11 Place & Promotion 11 Ethical Considerations 12 Conclusion 12 Reference 13 Introduction Aim and Objective This paper will try to shed some light on international expansion strategy of IKEA, which is a renowned furniture retailing company. The study has selected Indonesia as the venue for international operation for IKEA. At present, IKEA doesn’t have any business operation in Indonesia but the company has announced that it will enter Indonesian ready-to-assemble furniture market by establishing partnership with PT Hero Supermarket by 2014 (Cahyafitri, 2012). Hence, purpose of this essay is to understand marketing environment of Indonesian furniture industry and assume what can be plausible marketing strategy of IKEA to achieve competitive advantage over existing player in Indonesian furniture market. Understanding strategic dimension of international marketing mix of IKEA will help the study to predict viability of any marketing strategy of the company from international perspective. The study will also try to understand existing international marketing and strategic activities of the company in order to validate the proposed international marketing mix for IKEA in Indonesia. There are two major limitations are associate with this essay, 1- the researcher has used statistical data prior to recession in order to decrease the scope of outlier intervention in the growth projection and 2- the researcher has only relied on secondary data in order to prepare this report. Business Background of IKEA IKEA is renowned Dutch furniture retailer with Swedish origin and the company has established its presence over 30 countries across the globe. The company is headquartered at Delft, Netherlands and it was established by Ingvar Kamprad in the year 1943 (IKEA PS, 2012). The furniture retail giant has established its strong presence across 35 countries with the help of more than 300 retail outlets. According to report published by Euromonitor International (2009), IKEA is the biggest furnishing retailer in the world and earns annual revenue more than €20 billion from its worldwide operation. IKEA offers customized home furnishing solution, readymade furniture, and functional home furnishing products to customers. Scandinavian design and low price are the unique selling proposition (USP) of the Swedish furniture manufacturer (IKEA PS, 2012). Target customer of the company includes middle income families, couples, young people and students (IKEA, 2013a). According to report published by Euromonitor International (2009), IKEA targets those customers who are ready to participate actively in the sales cycle process, for example, self transporting the furniture parts, self-assembling different parts of the furniture etc. These customers are ready to engage in the service delivery matrix of IKEA in order to get quality furniture in affordable price. Business Operation of IKEA- International Context IKEA used centralized business model in order to maintain its international operations. International operation of the company is channelized and monitored by headquarter of the company whereas product development activities are monitored from Almhult, Sweden. According to IKEA (2011) has reported that, more than 600 million people across the world visit IKEA stores throughout the year whereas there are more than 700 million online visitors of the company website. IKEA maintain an international supplier base of more than 1000 in order to maintain its value chain operation. These suppliers belong to 55 different countries and help the company to manufacture tailor made furniture designing for the company. IKEA emphasizes on establishing long term partnership with international suppliers in order to decrease procurement cost for supply chain, decrease the cost of operation and ultimately deliver low priced furniture to customers. IKEA has the plan to open more than 10 international stores annually in order to fulfil its ambitious global growth objective (IKEA, 2011). Business Operation of IKEA- Asian Context According to report published by IKEA (2013b), the company has achieved only 3% market penetration in Asian furniture market. The company has established only 25 stores across different Asian countries. However, the market penetration of the company has been consolidated in countries like China, Japan and Singapore. Market presence of the company in South east countries like Indonesia, Philippines, Vietnam and Thailand is very small hence the company has decided to enter these markets by establishing joint venture with local players and franchise partners to set stores in the country. Industry experts have pointed out that IKEA will face challenges while expanding its store presence in Asian furniture markets because ‘affordable for everyone’ and Scandinavian image of the company is not well perceived among Asian customers ((Johansson and Thelander, 2009). Purchasing power parity of Asian customers is pretty less in comparison to customer of Europe and North America hence it is difficult for Asian customers to afford furniture products which are priced in context to purchasing parity of European customers. To avoid the problem, IKEA has constantly lowered its prices in China in order to compete with low cost rivals. IKEA needs to change its service delivery process in context to demand of Asian customers because value proposition of self servicing is not a desirable service mix among Asian customers (Johansson and Thelander, 2009). In Asian market, IKEA takes help of domestic players to decrease financial and non-financial risks associated with entering a new market, for example, Ikano Group supervises the operation of IKEA stores in Malaysia and Singapore (Ikano Group, 2008). International context for the study is Indonesia which has observed 6% rise in household consumption in last two years; hence there is no surprise that IKEA has become eager to enter lucrative furniture market in Indonesia. In Indonesia, the Swedish furniture retail giant will face competition from domestic retail players such as PT Cahaya Sakti Multi Intraco, PT Ace Hardware Indonesia (ACES) and many others. It is expected that, IKEA will establish strategic partnership with local retailers in order to overcome the competition (Cahyafitri, 2012). International Expansion Strategies of IKEA It has been already mentioned that IKEA relies heavily on subcontracted international suppliers in order to manufacture furniture items; however, the company has centralized its research and development activities in order to cut down the cost of overall value chain (Normann, 1993). IKEA took help of domestic retailers and promoters in order to establish stores in foreign market. For example, IKEA used mix of franchise and owned store business model in order to expand business operation in countries like Germany, UK, Italy and many other countries. Recently, IKEA has established strategic partnership with Marriott International (MAR) which renowned hotel chain, for providing furnishing solution and budget hotel services to customers (Savov, 2013). The Swedish retail giant takes help of joint venture, foreign direct investment, franchisee ownership, promoter holdings and strategic partnership in order to enter into new business category or new country. Macro Environment and Marketing Environment Environment Issues According to report published by Central Intelligence Agency (2013), gross domestic product (GDP) of Indonesia is more than US$900billion with annual growth rate hovering over 6%. Due to high GDP growth rate and lucrative business environment, foreign investors are showing the penchant for investing capital to explore business opportunity in the country. Macro-environmental analysis of Indonesia will help the study to explore existing environmental opportunities in the country. For example, Indonesia maintained a stable economic growth rate during the time economic meltdown across the globe. However the market opportunities in furniture industry of the country has been plagued by widespread corruption, lack of transparent government policy regarding foreign investment, poor IP law enforcement for corruption and counterfeit activities etc. Above mentioned activities have increased magnitude of entry or exit barriers for foreign companies and relatively insecure business environment can be cause of concern for IKEA and other foreign retailers who want to invest in Indonesia. Intellectual property law of Indonesian government is pretty much lenient in nature; hence there is possibility that IKEA will face competition from counterfeits in Indonesian market and ultimately end up losing market reputation and visibility. Per capita income of Indonesian people is US$3,900 (Central Intelligence Agency, 2013) which way below than per capita of people in Europe and USA. Hence, IKEA needs to change its pricing model and adopt penetration pricing in order to become relevant among Indonesian customers. Cultural Issues Muslims and locals are the largest segment in the population but there are other cultural segments such as wealthy Chinese minorities, Indians, Europeans etc which co-exist in the society. Green is the popular colour among Muslim customers hence IKEA can think about using green shades in the product mix. During Chinese New Year, IKEA can design their furniture with Chinese animal symbols and colour variants which are preferred by Chinese people. Preference for online shopping is increasing among Indonesian customers and they also prefer to buy products from modern retail outlets, hence IKEA has the opportunity attract customers by designing its stores in attractive manner, increasing visibility of merchandises through point of display promotion etc. Although inadequate infrastructural support might create problems for IKEA to develop stores in Indonesia but as IKEA will take help of local partners hence the problem of poor infrastructure is expected to get mitigated. Jakarta is the capital of the country and also the most important business location in the country hence IKEA should open its first store in Jakarta in order to get maximum brand exposure. Indonesian customers show perchance for mobile shopping, online shopping, hence IKEA needs to integrate its services through e-commerce and m-commerce in order to maximum market penetration. Trading Conditions Indonesian furnishing and furniture retailing industry is growing at a rate of more than 9% with annual sales revenue of more than US$1.4 billion (Wisesaputri, 2009). High growth rate of furniture industry in the country is caused by rapid urbanization, development of property market in Jakarta and other important cities. However, furniture market in the country is fragmented in nature; five of the leading companies such as Graha Vinoti Kreasindo (GVK), Garant Mobel Indonesia (GMI), Home Center Indonesia (HCI), PT Ace Hardware Indonesia (ACES) and PT Cahaya Sakti Multi Intraco contribute less than 50% of market share. Ace Hardware has more than 50 stores across the country while PT Cahaya Sakti Multi Intraco operates in the country with more than 30 distribution points in the country. Furniture companies and retailers in the Indonesia have segmented the market into two parts, 1- middle and upper income buyers and 2- lower to middle income buyers (Wisesaputri, 2009). Industry analysts have pointed out that, opening low end retail store in capital of Indonesia is less capital intensive choice in comparison to opening high end store for middle and upper income buyers. In the last couple of years, Index brand has seen fastest growth rate among furniture retailers in the country. According to analysts, Index brand offers holistic furnishing solution to customers which can fulfil all kind of furnishing requirement of customers, such kind of value proposition has helped Index to attract Indonesian customers who strive for value for money products and services. IKEA has the option to reshape the value proposition of Index brand in accordance with their product and service offering in order to increase penetration in the market. Average selling space for furniture retailers in the Indonesia lies in the range of 1500 square meter to 5000 square meter, hence IKEA need to find this much of area in commercial place in Jakarta and other important cities in the country for establishing the store. Marketing Environment From the marketing viewpoint, co-branding by furniture retailers with financial institution seems latest trend in the industry. Co-branding with banks helps furniture retailers to provide credit facility and Equated Monthly Instalment (EMI) to customers on product purchase. Some retailers provide loyalty card and reward scheme to customers in order to motivate them for repeat purchase (Wisesaputri, 2009). There are cross segment entrants in furniture industry in the country, for example, grocery hypermarkets such as Carrefour and retail chains are also selling low cost furniture to customers, which has not only increased complexity of the distribution channel but also negatively hurt the margin of existing furniture retailers (Cahyafitri, 2012). . International Marketing Mix for IKEA Armstrong and Kotler (2006) have stated that, there is strong relationship between demographic orientation of a particular country and requirement of customers in that country. Hence, it is very important for IKEA to identify customer segment in Indonesian furniture retail industry in order to create a road map for marketing strategy implementation. In the next part, the study will exercise strategic aspects of international marketing activity of IKEA in context to Indonesian market. Customer Segmentation Customer Segment Age Group & Characteristics Demographic Location Characteristics of the Demand Consumer Behaviour Single Professionals and Students These customers belong to the age group of 20-25; these customers live alone in rented house and apartment. They have just started working or still studying in different educational institutions. These segments of customers live in important cities such as Jakarta, Surabaya etc. These customers prefer low cost but stylish furniture which can accommodate one or two persons. These customers are ready to assemble the furniture by themselves in order to save the cost. These customers have limited access to wealth and allocate little money for household expenses. Due to young age, they prefer stylish design in furniture while small monetary allocation for household expenses forces them to look for low priced furniture. Family Oriented Customers Young family oriented customers belong to the age group of 25 to 35 whereas mature family oriented customers belong to mid age group. These customers prefer to live in extended family settings with children, grandparents and relatives. These customers prefer to purchase furniture which reflects originality and practical use. According to data published by Central Intelligence Agency (2013), majority of these customers have residence in different areas in Indonesia. However, the population is little dense in Jakarta. These customers have sufficient access to wealth and they are ready to pay extra money for quality service and premium furniture to customers. They prefer to purchase large furniture which can accommodate maximum family members. These customers also expect delivery, assembly service from furniture retailers while paying big buck on furniture purchase. These customers look for large and functional furniture which can mitigate demand of all the family members. In many cases, they purchase furniture which can serve as multipurpose for children. Business Customers They purchase furniture for office usage perspective. Mainly located in business hubs such as Jakarta, Bandung, Bekasi, Surabaya and other important cities. They prefer to purchase furniture in bulk in order to get discount. Business customers show penchant for professionally styled low cost furniture. They prefer quick delivery, assembly and after sales service services which can help them to save both cost and time. IKEA should design its marketing mix in accordance with the above mentioned customer segmentations and need to tweak its product offering which can fulfil the requirement of all three customer segments such as family member, business customers and single professionals. Brand There is no doubt that, international brand equity of IKEA is far greater in comparison to global presence of domestic competitors in Indonesian market. It has been already mentioned that, Indonesian market is multi segmented hence there is possibility that brand value might not be equally perceived by all the customers. However, IKEA needs to undertake various promotional activities in order to generate brand awareness among customers. IKEA can go for co-branding approach by establishing partnership with international and domestic banks in order to provide credit facilities and EMI scheme to customers. It is expected that, such co-branding model will increase acceptance of IKEA among Indonesian customers. Product & Price In Indonesia, IKEA should maintain product portfolio same as its Singaporean and Malaysian franchises. Cultural and demographic orientation of all these three countries is almost similar hence selling the existing product portfolio in Indonesian market would decrease financial and non-financial risk for the Swedish giant. Products should be designed on the basis of seasonality such as Ramjan, Eid al-Fitr and Chinese New Year. For localisation purpose, IKEA should slightly alter its product portfolio for Asian market in order to restrain them from wasting money on introducing irrelevant products for the market. IKEA has already achieved success in Chinese market by using the mentioned low cost localization model for offering product portfolio to customers (Ying, 2005). Hence, they can use this approach to penetrate in Indonesian Furniture market. Considering consumer behaviour in Indonesian market, it is advisable for IKEA to Assembly and delivery altogether with the product package. IKEA should decrease few steps in value chain operation and tweak the forward and backward integration in order to decrease the cost of product offering and offer low priced furniture in the range of mid to high quality to customers. IKEA should follow their operation model in China such as shifting the production and supply activities to local market in order to decrease price of the product portfolio which can attract price sensitive Indonesian customers. Place & Promotion IKEA should adopt integrated marketing communication (IMC) such as in store sales promotion, electronic display in point of sales, discounts in purchase, distribution of pamphlets to residents, television commercial, billboards, print advertisement and digital advertisement. IKEA should start the promotional activities at least 6 months prior to store opening in order to generate the hype about brand. Digital marketing will work as low cost medium to engage online users with the value proposition of IKEA. Product brochures and design of the store should be created in accordance with the Indonesian culture and style. Co-branding with popular financial institutions will also increase popularity of the IKEA among customers who have limited access to wealth. In the first phase, IKEA should open its stores in business hubs and important cities in the country in order to maximum exposure. Opening display stores in shopping malls located in focal point of cities will not only help IKEA to generate brand awareness in low cost manner but also decrease the cost of distribution and transportation. As it has been mentioned that, IKEA should follow localized business model hence the Swedish retailer needs to use various transportation mode in order to source product in low cost manner from manufacturing sites. Ethical Considerations As such there are very few ethical considerations are associated with the value chain process of IKEA. However, the company should try to decrease carbon emission throughout various supply chain activities, not to compromise with the quality of product and service delivery and refrain themselves from exploiting semi-skilled and unskilled labours in order to achieve business profit. Conclusion According to Von Krogh & Cusumano (2001), IKEA took time to change its conservative business model to globally flexible business model which allows the company to open stores in international locations. Being flexible has not only helped IKEA to use learning from the environment but also helped the firm to remain competitive in changing market dynamics. Nickerson & Zenger (2005) have found that, IKEA has gradually changed its corporate value system in order to adopt international culture into their Scandinavian value system. It is evident from the above discussion that, IKEA should blend itself with Indonesian culture in order to offer value which relevant to requirement of Indonesian customers and achieve sustainable market penetration. Reference Armstrong, G. and Kotler, P., 2006. Marketing: An Introduction. New York: Prentice Hall. Cahyafitri, R., 2012. IKEA furniture stores to open in Indonesia. [online] Available at: [Accessed 30 April 2013]. Central Intelligence Agency., 2013. People and Society: Indonesia. [online] Available at: [Accessed 1 May 2013]. Euromonitor International., 2009. Furniture and furnishings stores - Indonesia, Euromonitor International. [online] Available at: < http:// www.portal.euromonitor.com.ezproxy.lib.rmit.edu.au/passport/ResultsList.aspx> [Accessed 30 April 2013]. Ikano Group., 2008. The Ikano Group: Where we come from. [online] Available at: [Accessed 1 May 2013]. IKEA PS., 2012. IKEA PS Collection?2012. [pdf] Available at: [Accessed 30 April 2013]. IKEA., 2011. 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