Potential Economic Impact on Marketing Strategies - Essay Example

?Global Economic Environment and Marketing Contents Contents 2 Introduction 3 Potential economic impact on marketing strategies 3 Potential economic impact on customer behaviour 9 Specific growth opportunities in macro environments 12 Conclusion 13 13 Reference List 14 Introduction IKEA is one of the leading retailer’s of the world. The company has grown from strength to strength since its inception in 1943 (Isaksson and Suljanovic, 2006). IKEA has always been concerned about the wholesome economic development of the business and for this purpose, sustainability has always been an integral part of the core business model. This has lowered the cost of production for the company which in turn has provided them cost leadership. This also allows the company to maintain its environmental standards (The Times Newspaper, 2009). The key economic factors are: Firstly, the use of renewable raw materials and smarter use of them along with a dedicated relationship with suppliers have contributed to the company’s performance. Secondly, the economies of scale enjoyed by the company in terms of huge production scales. This has further lowered production costs. Thirdly, it has strategically placed its sourcing materials close to the supply chain to reduce costs. This factor further reduces the cost of handling by the company and contributes to its profit. Lastly, the use of innovative technologies has increased the profits of the company over the years. This paper aims to understand the impact on the marketing strategies of IKEA on account of globalization and the impact on the changing customer behaviour. Potential economic impact on marketing strategies IKEA initially operated with ten stores at the time it had opened. The increasing integration of the world economies on account of globalization has made IKEA operate a large number of stores to present day. The number of stores has raised to 345 in 42 countries in 2013 (IKEA Group, 2013b). IKEA has expanded its business across the continents of US, Asia along with the countries of Europe. The business environment it had to face in the different countries was different. For example, when it entered China, it faced a unique problem at hand by following its low pricing strategy. The Chinese customers were confused with the low prices of products, while the local companies began to copy the design. In China, the company chose to enter in a joint venture and customize its products to meet the aspirations of the clients (Chu, Girdhar and Sood, 2013). Porter’s five forces can be applied to understand the marketing strategy of the firm. Firstly, the competition from other firms becomes an important factor. IKEA has created a highly competitive market for its business. Secondly, the threat of new entrants can pose a problem to a firm. This threat is relatively less for IKEA because of high levels of market saturation and high capital investments. Thirdly, the bargaining power of suppliers is one of the forces. In case IKEA, all the suppliers strive to maintain a good relationship with the firm. IKEA has maintained strategic relationship with the suppliers, but reduced their bargaining power. The threat from substitute products is another component in Porter’s five forces. This threat is again weak in relation to IKEA because of its large scale. The bargaining power of the buyers is also less due to the large scale of operation of IKEA. This section concentrates on some of these forces in shaping IKEA’s choice (Luxinnovation G.I.E., 2008). Competitive advantage The factor which has contributed significantly to become the greatest competitive advantage for the company is cost leadership. This has mainly owes to the self-sufficiency of the company. The company strives to provide for the home furnishings that are contemporary in sense of style, robust in quality and offers it at reasonably fair prices. IKEA does not depend on the third party manufacturers instead the employees of the company design the low cost furniture which can be readily assembled by the customers (Suarez, 2006). Another factor which can be attributed to provide a competitive advantage of the company is the sustainable supply chain of the company. The era of globalization has made transparency of the supply chains an integral part for the competitiveness of the business. The stakeholders are now demanding more accountability and information relating to the ethical considerations of suppliers towards the workers and the environment. The rising consumer awareness in the recent times is more in developing countries than in the developed ones, which makes sustainability an important business agenda. IKEA’s work with its suppliers involves challenges like, the issues of energy and efficiency and sourcing materials responsibility. In one of the recent announcements, the company has declared to invest 1.5 billion pounds in renewable energy resources (Kaye, 2013). The company is relying on the Chinese suppliers to obtain solar panels at the lowest possible costs which would provide quick return on the investments. This is expected to reduce the carbon footprint of the supply chain and save money of the company and suppliers by lowering the utility costs. IKEA also trains its suppliers for matters related to sustainable procurement of the woods and other measures to reduce waste, energy and water. The strength of the value chain of IKEA comes from its efficient management of three main aspects, namely unique design capabilities, unique sourcing and brilliantly designed logistics (Roger, Grol and Scoch, 1998). The combination of all these factors provides a competitive advantage to the company which has made it one of the pioneers in its genre. Over the last 25 years, it has successfully expanded by eyeing markets in countries with growth potential. Segmentation, targeting and positioning IKEA has followed customized strategies for segmentation, targeting and positioning of the brand. This can be explained with the company’s experience in Europe and China. The value proposition for the European customers was providing good quality, low priced furniture at affordable prices, whereas the Chinese aspirations required them to make a slightly different proposition. This involved producing Western style based furniture for the middle class population. In general, IKEA’s target market of customers comprises of young buyers in search of stylish, modular furniture at low prices. The basic parameters, which IKEA uses, in its business models for segmentation of customers includes income level, age, family life cycle, lifestyle and benefit seeking. Experiences in China has shown that the apartments are small and this required designing small yet stylish furniture, compared to the European countries where the houses are large and required larger furniture. IKEA’s furniture has often been described to be used in the first homes of individuals. This explains the rationale behind the consideration of income levels, age and life cycles of the families (Johnson, 2013). Another major target set of customer for the market involves the college students and young adults. This group forms a major part of their customers as these people belong to a lower income category. The new families moving up in apartments also require good quality cheap furniture and therefore, are considered to be a major target customer for the company. They also believe in establishing relationship with the customers much beyond the value of the product purchased. So IKEA has made the store chains children friendly with playrooms and toys to enhance the shopping experience. The overall market segmentation strategy of the company can be presented with the help of the following diagram. Figure 1: Customer Segmentation (Source: Bartucca, n.d.) In regard to the positioning of the products, the specifics of the countries become important. The positioning of stores becomes important for easy accessibility of the customers. In American and European countries, the store locations have mainly been the suburbs, next to the highways where accessibility is easy. In the Asian countries, like, China, the stores have been strategically placed in the outskirts, closer to the railway networks for easier access. Branding The positioning of a brand largely depends on two factors which are the tangible attributes and benefits and intangible or emotional attributes. The brand positioning of the company depends on the following parameters: Pricing and quality of the products: It was one of the first companies which aimed at proving stylish, modern furniture to the emerging middle class of the developing and developed countries. Enjoyable product attributes of the products: The assembling of the ready to be used furniture provided the customers with the fun experience of assembling, which has increased the enthusiasm of using IKEA furniture. The idea of “flat-pack”, used by the company, has also reduced the transportation costs heavily. Building the store image: IKEA has consciously developed an image for its stores which can provide complete shopping experience to its customers, considering the economic and cultural aspects of the country it operates in. Egalitarianism: The company has been extremely transparent in doing its business. It has communicated its management culture with the customers. The employees of the company are treated with utmost importance to create a friendly work culture in the corporate environment. This created a group of productive and loyal employees who has contributed highly in creating value for the company, thereby driving productivity. Lifestyle of the people: One of the major concerns of the company has been to create a brand image which is sophisticated for a group of customers, with a taste in fancy home furnishings for their homes at affordable prices. The company has helped this group of people to realize their dreams by providing the same. Building a caring Swedish image: The stores have largely relied on its Swedish heritage in the expansion strategies that it has followed in the wake of globalization. The main motto of the company has been to create a better life for many which have prompted it to use renewable and sustainable means of production, thereby creating a loyal base of customers for the country. In short, the company has strived to become the brand for many in its due course of expansion (The Observer, 2005). The branding strategy of the company has relied on the satisfaction of customers from doing business with IKEA. Potential economic impact on customer behaviour The main drivers of the consumer behaviour are culture and globalization. Both of these factors have a major role in determining the purchasing decisions of customers in various countries. The conceptual definition of culture is “a human community, its individuals and social organizations, along with other economic and political systems” (Venkatesh, 1995). Consumer behaviour is described to be a cultural phenomenon as researchers have found that cultural groups are the unit of any research. The role of marketing is important, that acts as a moderator between the culture and consumer behaviour. Advertising specifically affects the consumer behaviour independent of the culture (Ubidia, 2013). Globalization can significantly alter the cultural orientation of customers. The effect of globalization on the cultural orientation of a customer can be explained with the help of the following figure. Figure 2: Globalization Impact on Culture (Source: Ubidia, 2013) The global consumer culture represents the similarity in the behaviour of customers or their homogenization because of increased integration of the world economies. The population in the urban areas of developing and developed countries exhibit similar buying patterns. The regional consumer culture is also one of the homogenizing effects of globalization. It has been observed that certain regions of the world exhibit certain similarities, in terms of their markets and demography and companies have been using similar marketing strategies in these countries. Globalization may also have heterogenic effects on the demography where the consumers are driven by a sense of identity of their own national culture. Consumers who are driven by these values are a part of national consumer culture or ethnic consumer culture. Finally, globalization has also resulted in the migration of people across domestic geographies and settling of people in different countries, thereby impacting the national culture of the country where they are settled (Orozco, 2001). This phenomenon is described as the individual consumer culture which represents the differences of cultural orientation of the country of which the consumer is an inhabitant (Ubidia, 2013). In order to create a loyal customer base for the company, the IKEA group has constantly been exploring their products to suit the specific need of the country it operated in. The experience of the company in Europe and China has been discussed previously to explain the case. Case study relating to the company has revealed that in an attempt to increase its market share, the company has been largely relying on the detailed analysis of the consumer behaviour. The customers who prefer not to use the furniture manufactured by IKEA are singled out based on surveys (Schirone, 2006). The company, through detailed study, has separated its loyal group of customers from the occasional buyers. The customers in the loyal segment include the middle-high class from an economic and cultural point of view. The roots of this customer group can again be traced to globalization. The post-modern customers are more concerned with the quality of products, rather than obtaining them at the lowest possible price. This is because there is a visible rise in the desire of these people to maintain a status symbol in their living standards. The occasional buyers of the IKEA products have displayed a particular demographic status. The age group of 33-45 years specially form this group with relatively lower educational qualification (Schirone, 2006). One of the key reasons which have contributed to growing popularity of the products is the rising awareness of the customers, in terms of using sustainable methods in the production. The demand for greener products is directly traceable to the rising awareness of customers and IKEA’s response to the situation by employing renewable energy has paid off by earning more customers. Specific growth opportunities in macro environments The PESTEL analysis of the countries becomes important in understanding the opportunities that can be enjoyed by the company. The political structure of countries makes the tax regimes different, allowing some companies to earn more profits compared to others. In countries like, UK and USA, the regional profits of IKEA are subject to regional taxes. Tariffs and trade barriers imposed by the business also has an impact on their profitability (Lankashire, n.d.). As IKEA does not depend on third parties for its products and promotes local manufactures, this means the tariff barriers do not impede the business much. The economic factors like, growth of the emerging markets and availability of cheaper labour in developing countries, matters. IKEA has used appropriate methods to reap benefits from these opportunities. The social factors of the country include its demography and the varying demand according to it. IKEA has studied the social factors well before venturing in any new country. In the technological aspect of inventing technology like, Radio Frequency Identification, has immensely improved the retail industry. The rising importance of social media has also contributed to the advertising by the firms (IKEA Group, 2013a). The opportunities of IKEA come from the following factors: The rising demand for greener products. The current financial position of the population across continents, which drives customers to use cheaper quality better products, rather than expensive products. The proactive measures followed by the company to reduce the carbon footprint and wastage. Rising proportion of middle class with increasing levels of disposable income. Conclusion This report has discussed the competitive advantage of IKEA. Globalization has encouraged firms to explore new countries to expand their business. It has been observed that IKEA had modified its marketing strategies depending on the country it has operated in. The competitive advantage of the firm has mainly come from the cost leadership structure that has been followed by it and the sustainable supply chain it has created. The use of eco-friendly raw materials has improved the cost efficiency of the firm and improved the image of the brand. The changing customer taste in the recent times and its impact on the marketing strategies has also been studied in details. IKEA has segregated its group of target customers in improving its potential of sales. Reference List Bartucca, N., n.d. Contemporary Marketing Strategy. [pdf] Middlesex University. Available at: [Accessed 31 December 2013]. Chu, V., Girdhar, A. and Sood, R., 2013. Crouching tiger tames the dragon. Business Today, [online] 21 July. Available at: [Accessed 31 December 2013]. IKEA Group, 2013a. IKEA Group Yearly Summary FY12. [pdf] IKEA. 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