Entry Strategy of IKEA into Brazil - Essay Example

The Director of International Marketing - BCG Consultant IKEAs Entry into Brazil Report Executive Summary According to Inter IKEA Systems B.V. (n.d.), IKEA was established in 1943 by Ingvar Kamprad as a mail order business in Sweden. The company opened its first store in Sweden in 1958. IKEA prides itself in offering home furnishing products that are well designed with good functionality at prices that are much lower than competitors. This is achieved by employing cost cutting solutions that do not affect the quality of the product. IKEA through its various marketing strategies has created a steady demand for its products. The company also prides itself in being innovative and has managed to get customers to accept products that they would not normally accept through design changes. In the initial stages IKEA expanded its business into new markets outside of Sweden including Norway by direct entry and by acquiring other businesses. However, over the years IKEA has been focusing on expansion of its business through franchising. IKEA now operates over 325 stores which are located in 35 countries. An analysis of the Brazilian market indicates that it is a very promising environment for IKEAs products. The standard of living of working class individuals have improved and this has increased their demand for various products including home furnishings. Upper and middle class Brazilians have high disposable income and are willing to spend on high quality brand name products and so it would be good if IKEA offer goods for different segments of the market instead of focusing on just low priced products. Additionally, research indicates that 59% of Brazilians have a preference for foreign brands over home brands. However, there are certain obstacles in the political and legal environment that may negatively impact the success of IKEAs business. Furthermore, the currency of Brazil is overvalued. It is therefore important that IKEA use its resources to correct weaknesses in its operations and make use of opportunities and lessen the impact of threats in the environment. Introduction IKEA operates 325 stores in 35 countries throughout the world. The company’s first stores between 1955 and 1978 were opened in Sweden, Norway, Denmark, Switzerland, Germany, Australia, Hong Kong, Canada, Austria, Netherlands and Singapore. Since then the company has expended its operations to 24 additional countries. However, the company does not have a presence in Brazil. Most of IKEA stores are franchises and therefore the company does not have to provide any capital outlay. However, franchise fees are dependent on the success of its franchise operations. In determining a strategy for IKEAs entry into Brazil, a thorough research of the Brazilian market is required. This research will involve an analysis of the macro-environment in which furniture manufacturers and distributors operate in Brazil and a strengths, weaknesses, opportunities and threats (SWOT) analysis. Evaluation of IKEA International Marketing Approach The marketing strategy used by IKEA is to set the price of its home furnishing products low enough that as many persons as possible will be able to afford it. The IKEA concept is aimed at providing low priced products so that more people can live a better life. This concept guides the design, manufacture, transportation, sale and assembly of IKEAs products (Inter IKEA Systems B.V. n.d.). IKEA is constantly evaluating new countries and the decision to enter is made after a thorough research. This will involve an analysis of the political, economic, social, technological, ecological and legal (PESTEL) environment and a SWOT analysis. Appendix 1 provides a PESTEL analysis of IKEA. A SWOT analysis of IKEA is also provided in Appendix 2. IKEA sells a wide range of products and each one of these products experience varying demands. IKEAs products may be analysed using the BCG matrix. In this matrix products are classified into cash cows, stars, dogs and question marks. IKEA should be able to determine which products have the characteristics of: stars – products with high market growth and high market share; cash cows – products with low market growth and high market share; dogs – products with low market growth and low market share; and question marks – products with high market growth and low market share. Harrison et al (1993, p. 48) indicate that stars require support by way of investment in order to turn them into cash cows. Little investment is needed for cash cows to maintain their market share as the market for such products have peaked. Questions marks may need additional investments in order to gain additional market share in a growing market. Dogs do not appear to have a significant role to play and so they need to be divested. By classifying products according to this matrix, IKE will be guided on which products to export into the Brazilian market. Market entry strategy A strategy is a plan of action. A market entry strategy would involve a plan to enter new markets. Berkowitz et al (1997, p. 50) indicate that a marketing strategy is usually characterised by a specified target market and a marketing program to achieve it. In entering a market when has to pay attention to various aspects of the entry mode and the marketing mix. Market entry mode Papyrina (2007, p. 74) suggests that both the timing and entry mode of company into a mew market could have a joint effect on stability. Therefore, it is the practice of multinational corporations (MNCs) to select an entry mode when it decides to enter a foreign country. They often consider simultaneously, when to enter and how. Young et al (qtd in Harrison et al 1993) indicates that forms of international market entry include: exporting, licensing, franchising, management contract, turnkey contract, contract manufacturing, joint ventures and wholly owned subsidiaries. Factors influencing entry mode classified into three categories include: ownership advantages of the firm; location advantages of a market; and internalization advantages of integrating transactions (Agarwal and Ramaswami 1992, p. 1). IKEAs current entry mode is through franchising. Franchising is Inter IKEA Systems B.V. (n.d.) indicates that a number of factors are considered in selecting franchisees. These include: Retail experience – thorough retail experience is required Local market knowledge and presence – this should be extensive Corporate culture and values Financial strength – ability to carry through the investment is of paramount importance. The franchisee is expected to penetrate the company in full as only one franchise is allowed per country. A large scale retail environment format is required. The ability to establish and operate IKEA stores nationally must be demonstrated by the franchisee. Brand positioning Brand positioning is critical to brand success (Brand Identity Guru, Inc n.d.). IKEA has positioned itself globally with a variety of products that brings comfort into the homes of those who purchase them. The IKEA brand originated in Sweden and the colours used in the IKEA sign represent the colours on the Swedish Flag. Martin (2010) indicates that a strong country of origin (COO) can give a product an edge over other products in the marketplace. Country of origin is used to judge the quality of a product and they may focus on this rather than on other information. Favourable country perceptions are therefore lead to favourable perceptions of associated attributes such as product quality (Kinra 2006, p. 17). This happens automatically out of conscious awareness. Hlavinka and Sullivan (2011) indicate that 30% of Brazilians are accepting of foreign brands and 59% of customers indicate that they trust global brands over local brands. There are a number of strategies that can be used to boost how customers view a product’s country of origin (Martin 2010). They include: Time to think – allow the customers to see themselves using the product. This will allow them to identify with it. Using the imagination – encourage people to consider the experience of consuming the product by making the messages evocative. It’s all about you – involves the use of you, I, my and me in the advertisements to show inclusion and for mass appeal. According to Becker-Olsen et al (2011) global consumer culture positioning (GCCP) theory indicates that by associating global consumer culture (GCC) with brands can have a positive effect on firms. Because of the possibility of differing understanding of GCC signs and behaviours, there are numerous options available for marketers to associate a brand with GCC. One such is standardization in across markets which share a similar understanding. Other options include foreign consumer culture positioning (FCCP) and local consumer culture positioning (LCCP). Although GCCP theory does not suggests that standardization is universally desirable it can be advantageous to the acceptability of a brand as “global”. The interactions between brand positioning and consumer perceptions impacts on the degree to which a brand is viewed as global (Holt et al 2004). Exposure of consumers to brands in the general media and through marketing promotions influences perceived brand globalness (Akaka and Alden 2010). Downie (2011) indicates that customers are wiling to spend sometimes more than twice the price for a product than is paid in advanced countries like the USA and the UK. However, adaptation of the brand to the local culture may be beneficial to IKEA. Marketing Mix IKEAs marketing mix consists of the 4Ps of product, price, promotion and place. Products - IKEA sells a wide range of furnishing products for the home. They are very functional with good design and are packaged to make them easier to transport. They are also easy to assemble high quality products. The products are made in Sweden and are highly standardized. Price – IKEA prides itself in combining a low price with good design. The company’s products are of high quality and therefore provide good value for money. Promotion – The products are promoted in catalogues that reach millions of consumers. Brazil is the most wired nation in Latin America and therefore the internet is a good media from which to reach customers. Since 1997 IKEA sought to increase its market share using the internet. Place – IKEA stores are normally large as the company seeks to provide a place which can accommodate a wide and deep range of products that people can take home and enjoy immediately. Utilising the 7Ps of marketing by adding the service elements of people, process and physical evidence indicates that IKEA provides customers with a wide variety of products that in their spacious stores. People – IKEA seeks to appeal to its customers is by providing other facilities such as restaurants that customers can enjoy while they go through catalogues and brochures Process – Customers are able to enjoy the products they purchase immediately. IKEA makes this possible by having the products on hand in an easy to assemble form. Physical evidence – IKEAs large stores are evidence of the emphasis it places on satisfying the demand of its customers. The realistic home and room settings inspire customers to purchase goods which they can take home immediately. Standardization versus Adaptation Consumer preferences may vary from country to country and so IKEA needs to customise its products to the tastes of Brazilians. IKEA may choose to offer only some of its thousands of products in Brazil based the differences in the competitive climate. IKEAs products are manufactured in different countries and Brazil could be one of the countries in which manufacturing is done. Conclusion and recommendations IKEA may have benefited from franchising as a mode of entry into most of the markets in which the company operates. However, it might be beneficial to consider a joint venture if no investor is coming forward to be a franchisee in an attractive market. There are a lot of advantages to operating an IKEA store in Brazil. It a big market with mainly local operators and the majority of Brazilians have an affinity for global brands. Brazilians are also willing to spend once they obtain good service and value for money. In order to continue the company’s positive growth trend IKEA needs to consider investing in large markets like Brazil which has one of the highest population as well as population growth rates. The best method may be franchising as this is a less risky alternative. However, other methods such as joint venture which was used in India may be considered for this market. This along with continued innovation will allow the company to extend the life cycle of IKEAs products much longer than expected in existing markets. The company should also change its pricing strategy in order to attract customers from various income groups. Brazil’s upper high income earners are willing to pay for Brand name products. IKEA is a global brand and therefore the possibilities for increased revenue from market segmentation should be seriously considered. This market should be more successful than the US. Too cheap a price may be taken as a reflection of poor quality. Adaptation to local culture is important. However, it is not strongly recommended since IKEA is perceived to be a global brand and various styles associated with different countries could be successfully marketed in Brazil. References Akaka, M.A. and Alden, D.A. (2010). Global Brand Positioning and Perceptions: International Advertising and Global Consumer Culture. International Journal of Advertising: 29(1), p. 37-56 Agarwal, S. and Ramaswami, S.N. (1992). Choice of Foreign Market Entry Mode: Impact of Ownership, Location and Internalization Factors. Journal of International Business Studies: First Quarter 1992 p. 1-27 Becker-Olsen, K.L., Taylor, C.R. Hill, R.P. and Yalcinkaya, G. (2011). A Cross-Cultural Examination of Corporate Social Responsibility Marketing Communications in Mexico and the United States: Strategies for Global Brands. Journal of International Marketing: 19(2), p. 30-44 Berkowitz, E.N., Kerin, R.A., Hartley, S.W. and Rudelius, W. (1997). Marketing. 5th ed. USA: Irwin McGraw-Hill Brand Identity Guru, Inc. (n.d.). Effective Brand Positioning. [Online] http://www.brandidentityguru.com/positioning.htm [Accessed 14th Nov 2011] Downie, A (2011). In Brazil: For the Love of Shopping. [Online] http://www.nytimes.com/2011/11/10/fashion/in-brazil-for-the-love-of-shopping.html?_r=1 [Accessed 16th Nov 2011] Euromonitor International (2009). House wares and Home Furnishings in Brazil. [Online] http://www.euromonitor.com/housewares-and-home-furnishings-in-brazil/report [Accessed 19th Nov 2011 Euromonitor International (2011). Furniture and Furnishing Stores in Brazil. [Online] http://www.euromonitor.com/furniture-and-furnishings-stores-in-brazil/report [Accessed on 19th Nov 2011 Harrison, J., Holloway, M., Jenkins, T., Martin, G. and Mills, G. (1993). Management and Strategy. 1994 ed. London: Certified Accountants Educational Projects Hlavinka, K and Sullivan, J. The 2011 Colloquy Cross-Cultural Loyalty Study: Part 1. [Online] http://www.colloquy.com/2011-cross-cultural-research.asp [Accessed 19th Nov 2011] Holt, D. B., Quelch, J.A. and Taylor, E.L. (2004). How Global Brands Compete. Harvard Business Review: 82(9), p. 68-75. International Monetary Fund (2011) World Economic Outlook: Slowing Growth, Rising Risks. http://www.imf.org/external/pubs/ft/weo/2011/02/pdf/text.pdf IKEA (n.d.). The IKEA Concept. [Online] http://franchisor.ikea.com/showContent.asp?swfId=store2. [Accessed 14th Nov 2011] Kinra, N (2006). The effect of country-of-origin on foreign brand names in the Indian market. Marketing Intelligence & Planning: 24(1), p. 15-30 Martin. B. (2010). Boosting your product’s country of origin. Journal of Strategic Marketing: 18(4), p. 357-358 Papyrina, V. (2007). When, How, and with What Success? The Joint Effect of Entry Timing and Entry Mode on Survival of Japanese Subsidiaries in China. Journal of International Marketing 15(3), p. 73-95 PricewaterhouseCoopers (2005). Doing Business in Brazil. [Online] http://www.pwc.com/pt_BR/br/publicacoes/assets/doing-business-brazil05.pdf [Accessed 18th Nov 2011] . Appendix 1 PESTEL Analysis of Brazil Political Brazil’ political environment is currently stable with the workers party in their third term. There are no threats of communism to deter investors as in the past Economic Income and consumption has been growing in recent times and between 2006 and 2010 real gross domestic product (GDP) has increased every year except 2009, during the height of the recession when there was negative growth in real GDP (IMF 2011, p. 184). Credit has expanded as interest rates are trending down and credit is pervasive in the Brazilian culture (Downie 2011). The Brazilian currency the reais is overvalued (Downie 2011). The rising purchasing power among lower income consumer groups suggests that millions of Brazilian consumers are now able to afford products for their homes. The ability to get easier credit allows them to purchase home furnishing products that that did not have before or to upgrade the ones they now have (Euromonitor International 2011). Consumption in emerging markets of which Brazil is a part have been growing strong for sometime as it has been propelled by rapidly expanding employment and incomes (IMF 2011, p. 4). The wealthiest areas of the country are the South and South-east (PWC 2005). Social Brazil is a very huge market of mostly lower income consumers from varying cultural backgrounds including Portuguese, German, Italian, Japanese, Eat European and African. There is an abundance of skilled and semi-skilled labour (PWC 2005). Brazilians are fun loving and enjoy good living Brazilians are also willing to pay for brands and this could augur well for IKEA. More Brazilians are gaining employment so more persons with more disposable income Technological Changes in technology have changed the way that business and advertising is done. Brazil is the most wired country in Latin America and so the internet plays a significant role in marketing Ecological The protection of the environment is important in reducing the emission of greenhouse gases (GHGs). As a member of the group of twenty (G20) influential countries, Brazil is required to help in the fight against climate change and so may have to pass tough carbon cutting laws as those passed by some of the more advanced G8 countries. Legal The cost of doing business in Brazil is onerous, complex and bureaucratic (Carlos Ferreirinha, qtd in Downie 2011). Government regulations and taxes, distribution and logistics are confusing and make it difficult for brands to handle (Downie 2011). The level of taxation is high and the degree to which goods are essential is the main criteria used to fix ad valorem rates (PWC 2005). Appendix 2 SWOT Analysis of IKEA Strengths IKEA has a good brand image The ability to sell quality goods at a low price IKEA has a number of franchise operations and so it is able to get huge discount on volumes Weaknesses The companies products are standardised Opportunities Brazil is an emerging economy with a very large population Income and employment has increased and the number of upper income and middle income individuals have been increasing Brazil has a lot of unskilled and semi-skilled labour Brazil have resources that would be used in the production of home furnishing products Threats There are high taxes on imports especially of non-essential goods Read More