Analysis and Justification of Indian Market - Assignment Example

? Ikea & India Table of Contents Part A: Analysis p.3 a. Introduction p.3 b. Analysis and justification of Indian market p.4 c. Porter’s Five forces Model : p.4 d. 7 P’s : p.6 2. Part B: Discussion : p.10 a. Strategy development : p.10 b. Implementation : p.13 c. Critical reflection : p.16 3. References : p.18 Part A: Analysis Introduction Ikea is one of the most prominent home furniture manufacturers in the world. Headquartered in Sweden, Ikea company was founded by Ingvar Kamprad. In the 1940s-1950s, Ingvar Kamprad shaped the development of IKEA into a furniture retailer. During 1960s-1970s, it became the prominent furniture manufacturer in Sweden. In the 1980’s, IKEA expands dramatically into new markets such as USA, Italy, France and the UK (Ikea, 2012). At present, Ikea has operations in more than 40 countries in the world. However, it has no business units in India at present even though India is one of the most rapidly developing economies in the world. Many people believe that India may become a superpower both in terms of economic growth as well as military power in near future itself. Moreover, it is often said that global wealth is currently shifting from less heavily populated American and European continents to the more heavily populated Asian continent because of the rapid growth witnessing in India and China like countries. Prominent international companies are currently competing each other in establishing business units in India like emerging markets. Under such circumstances, it is difficult for Ikea like MNC’s to avoid India completely while formulating their international business strategies. This paper analyses the merits and demerits of India as a market for Ikea’s international business operations. Analysis and justification of Indian market Porter’s Five forces Model Michael Porter has identified five competitive forces which may affect the competitive power of an organization. They are; Threat of substitute products, Threat of new entrants, Intense rivalry among existing players, Bargaining power of suppliers and Bargaining power of Buyers (Porter’s Five Forces Model, 2009). The figure given below illustrates Porter’s five forces theory. (Porter’s Five Forces Model, 2009) Threat from new entrants is the first force in Porter’s five forces model. “Microeconomics teaches that profitable industries attract new competition until the downward pressure on prices has squeezed all the economic profit from the firms. New firms in an industry put downward pressure on prices, upward pressure on costs and an increased necessity for capital expenditures in order to compete” (Porter’s Five Forces- Threat of New Entrants, 2012). Furniture market in India is not much competitive because of the absence of prominent companies. In fact furniture manufacturing is a small scale industry in India and hence MNC’s like Ikea can easily overcome the resistance of small scale furniture manufacturers in India. In other words, Indian furniture industry is highly fragmented and Ikea can exploit such situation to their favor. Less threat from new entrants or competitors will help Ikea to increase their profits in Indian market. “Competitive rivalry will be high if there is little differentiation between the products sold between customers” (For Marketing Learners Globally, n. d). As mentioned earlier, Nokia may not face much competition in Indian market because of the absence of any furniture manufacturing MNC’s in Indian market. Small scale furniture manufacturers in India may not have the financial capabilities to compete with Ikea like big companies. “Supplier power exists when there are only few suppliers. It also exists when the switching cost becomes more for the organization to move from one supplier to another” (For Marketing Learners Globally, n.d). Availability of wood for manufacturing furniture is different at different locations in India. For example, India’s southernmost states such as Kerala have immense forest resources whereas North India has less forest resources. In other words, supplier power is different at different parts of India. Buyer power is the fourth force in Porter’s five force s model. “In general when buyer power is strong, the relationship to the producing industry is near to what an economist terms a monopsony- a market in which there are many suppliers and one buyer”(Porter’s five forces, 2010) . In such markets, buyers have immense power and they can set prices of the commodities. Economic growth in India is not evenly dispersed across the country. In other words, some parts of India are less developed than other parts of India. For example, states like Kerala, Gujarat, Delhi, Maharashtra, Karnataka and Tamil Nadu etc are highly developed whereas states like Uttar Pradesh, Madhya Pradesh, Bihar etc are less developed. Therefore, buyer power is different in different states. Moreover, majority of the Indian states are extremely diverse in terms of culture and hence purchasing habits of this diverse population is extremely different. For example, people in Kerala or Maharashtra are extremely interested in decorating their houses with beautiful furniture whereas people in Tamil Nadu or Andhra Pradesh are not much interested in spending too much money for the home furniture. Threat of substitute products is the fifth force in Porter’s five forces model. “Threat of substitutes occurs when companies within one industry are forced to compete with industries producing substitute products or services” (Threat of substitutes, 2012). Indian market is not free from the threat of substitute products in furniture industry. Plenty of furniture manufacturers from China are currently operating in Indian furniture market. As in the case of many other products, Chinese furniture are extremely cheaper compared to the furniture of other manufacturers. It should be noted that manpower cost in China is extremely low. Moreover, China believes in mass or bulk production to reduce the unit prices of commodities. All these factors help them to reduce the prices of their commodities in international markets. 7P’s Product, price, promotion, place, packaging, positioning and people are the seven P’s of marketing (Tracey, 2004). Home and office furniture are the major products in the case of Ikea. The potentials of home furniture products in India are extremely high. “Among all the types of furniture, the office furniture segment is the one that boasts the most important, both from the point of view of size and of the technological innovation of the production. The total production of furniture in 2001-02 according to Annual survey of Industry was USD 3580 million” (Indian Furniture Industry, 2012). It should be noted that industries are growing at rapid rates in India. Therefore the demand for office furniture is growing. Since many prominent foreign companies are currently operating in India, demand for foreign furniture models and designs are immense in India. The existing furniture market in India is making use of the traditional Indian designs. The entry of Ikea would help Indian furniture market to get the taste of European designs. Price is the second factor in the 7 P’s of marketing. Pricing can make or break a product. It should be noted that even high quality products may not excel in a market if the pricing is poor or extremely higher. Even though India is an emerging market, still the purchasing abilities of Indians cannot be compared with that of the Americans or Europeans. The per capita income of Indians is extremely low compared to that of the Americans of Europeans. Promotion is the third factor in the Seven P’s of marketing. “Promotion is an attempt to increase sales of a product through the use of various communications. These include advertising, public relations, sponsorships, direct mail, in-store displays, website banners and other activities that get your product in front of consumers”(Samuels, 2012). Even cheap quality products may excel in the market with the help of effective advertising and promotion strategies. At the same time, even better quality products may fail in the market if the promotion strategies are poorly formulated. Sales promotions help companies to explain the merits and features of their products to the customers with the help of suitable communication strategies. As mentioned earlier, Indian furniture industry is growing at a rapid pace. “Indian tastes have started to be more refined and Indian people are looking for more western furniture style” (India Furniture Industry, 2012). Globalization and liberalization have brought huge changes in global markets and the case of India is not an exception. The intrusion of foreign culture is evident, virtually in every segment of human life in India. The thirst for foreign goods is growing day by day in India. Moreover, Indian government is currently trying to encourage foreign direct investments as much as possible. It has already liberalized many of its policies to smoothen the entry of MNC’s in Indian market. As a result of that, foreign companies are currently giving first priority to Indian market while they take expansion decisions. The following chart illustrates the growth of FDI in recent years. (Chakraborty & Nunnenkamp 2006, p.38) Inflation rate in India is acceptable up to certain extent. Even though it crossed the 10% mark once in 2011, it remains almost stable at around 7% in recent months. The chart given below gives a rough idea about the variations in inflation rates in India in recent months. (India Inflation Rate, 2012). “Proper packaging can increase sales through product differentiation and brand recognition” (Curtis & Nakamoto, n.d., p.12). Ikea is an international band with a good brand value all over the world. But, in India, Ikea is not at all a familiar name. Ikea should implement suitable strategies to increase its brand awareness in India as much as possible. “Product positioning is the process marketers use to determine how to best communicate their products' attributes to their target customers based on customer needs, competitive pressures, available communication channels and carefully crafted key messages”(Richards, 2012). Communication technologies are developing rapidly in India at present. The influence of Computers, internet and Mobile phones can be witnessed in every segment of Indian social life now. The needs of the Indian consumers are changing rapidly because of the rapid growth of economy and that of the living standards. Ikea can capitalize on such changing trends in Indian social life and consumer behaviors to boost their chances in India. Indian people are extremely diverse in terms of culture, economy, living standards and education. India consists of 28 states and four union territories. Even though Hindi is the national language in India, majority of the people in different Indian states have their own local language. In other words, Ikea should make sure that they utilize local languages more and more while communicating with the people of a particular state in India. Part B: Discussion Strategy Development Joint venture seems to be the best mode of entry for Ikea in India. “A joint venture is a strategic alliance between two or more individuals or entities to engage in a specific project or undertaking” (Advantages & Disadvantage of a Joint Venture, n.d.). Since Ikea is a Swiss company, their awareness about the local culture in could be extremely low. In order to excel in a foreign country, an MNC should definitely know the cultural traits of that country. Collaboration with a local furniture manufacturer in India may help Ikea to gain more knowledge about the socioeconomic status of Indian people as well as the political and legal frameworks of India. “According to UN agency, “the Indian economy is likely to expand by 8.1 per cent in 2011, the fastest growth rate in the world after China” (India's GDP to grow 8.1% in 2011, second only to China: UNCTAD, 2011). India’s rapid economic growth and readiness to welcome FDI are giving better business prospects for Ikea in India. Since India is the second most heavily populated country in the world, the economic growths in India is not reflected evenly in the urban and rural areas. In the rural areas the living standards of the people are still much lower than that in urban areas. Therefore, Ikeas should make two types of business strategies for India; one for the rural areas and the other for the urban areas. In urban areas, Ikea can promote their expensive items whereas in rural areas they can promote cheaper items. According to Ghemawat (2001), “Distance between two countries can manifest itself along four basic dimensions: cultural, administrative, geographic, and economic” (p.138). In other words, India is country which is extremely different from European countries in terms of culture, administration, geography and economy. India is hot climatic country whereas Europe or America is cold climatic regions. It is not necessary that the furniture suitable for cold climatic regions may suit to the hot climatic regions. Therefore, Ikea should make certain changes in their furniture manufacturing technologies to suit the needs of Indian climate and people. It should be noted that Indian people may not throw away their furniture after the use of a couple of years. They always give priority to long lasting items while taking any purchasing decisions. Social media are getting huge popularity in India at present. Ikea can use social media effectively for increasing their brand awareness in India. Social networking marketing spending has been increased a lot in the past. According to a report, it has increased from $884 million to $2.34 billion in between the period 2007-2009 (Dickey & Lewis, 2010, p.140). As mentioned earlier, Ikea brand is not much popular in India at present. Ikea should give more importance to its brand building process in India through social media so that more and more people get awareness about Ikea’s capabilities in furniture manufacturing. “India is a relatively closed economy because of the lukewarm reception the Indian government gives multinationals. However, India has been open to ideas from the West, and people have always been able to travel freely in and out of the country”(Khanna et al, 2005, p.67). India is opening its economy cautiously to foreign direct investment. Strong protests against the entry of Wal-Mart like retailers are currently going on India. This is because of the concerns of possible destruction of domestic industries as a result of the entry of foreign retailers. “Many small business owners and workers fear that the arrival of large scale supermarket chains will lead to drastic job losses as India's supply chains and shopping habits are transformed” (Nationwide strike hits parts of India, 2012). Therefore, Ikea should formulate their strategies cautiously so that protests against their entry could be minimised. Ikea should convince the Indian political parties that their entry may not cause much damage to the Indian small scale industries. For that purpose, they should first convince Indian politicians. Since politicians in India have significant ideological differences, it is not easy for Ikea to convince all of them. However, they should target the ruling parties in present coalition government and BJP, the main opposition party in Indian politics. “Government inevitably plays a variety of roles in an economy. Its most basic role is to achieve macroeconomic and political stability” (Porter, 2000, p, 26). Political stability in India is not so good at present. No individual parties have majority in the parliament and hence a coalition government is functioning in India at present. Therefore, the prime minister cannot take independent decisions without consulting the opinions of the leaders of the political parties in the coalition government. However, being a renowned economist, current prime minister Man Mohan Singh is not reluctant in welcoming FDI which is a positive sign for Ikea. India is following a mixed economic policy. In other words, both public and private sector businesses are encouraged in India. India is keen in protecting public sector industries. Since no public sector companies are operating in furniture manufacturing business, Ikea can expect not much protests from the public sectors. However, there are plenty of business clusters exist in India. “Clusters are geographically proximate groups of interconnected companies and institutions that are linked by commonalities and complementarities”(Goerzen & Colevic, 2012, p.1). In other words, plenty of companies in India are operating in a collaborative manner. For example, Suzuki has strategic tie up with Maruti whereas Honda has same relationship with Hero Company. Moreover, Fiat has recently established collaboration with TATA group to sell their vehicles in India. In short, several business alliances are functioning successfully in India for a longer period. Ikea can take lessons from such alliances and think in terms of establishing one with any of the Indian furniture manufacturer. Implementation Implementation of strategies is vital for business success. There is no use in framing good strategies if the implementation part is not done properly. Since India is a diverse country, it is not necessary that the strategies successfully implemented in one part of India could be implemented successfully in other parts as well. For example, Shah Ruk Khan is a Bollywood celebrity who has immense fans in northern India. Rajnikant is much more famous than Shah Ruk Khan in southern India. On the other hand, Sachin Tendulkar has fans all over India and across the world. Therefore, before selecting the brand ambassadors, Ikea should consider these cultural or peculiarities. “Recently, there has been a growing interest in understanding how WOM (Word Of Mouth), particularly online WOM (which is a form of social media), impacts sales, diffusion, and other marketing performance measures” (Stephen & Galak, 2010, p.5-6). As mentioned earlier, viral marketing is getting more popularity in the business world at present. The core of viral marketing is Word Of Mouth publicity. Current consumers value the opinions of others more than what they received from product advertisements, while they take any purchasing decisions. Suppose a consumer puts positive feedbacks in social networks about a product he has purchased recently. Those who are going through that information, may value it more than the advertisements and other promotions strategies implemented by the product manufacturer. Therefore, Ikea should increase its presence in social media so that their products may get more and more WOM publicity. India is an extremely diverse country, both in terms of culture and geography. The climatic conditions in India are different at different states. While the northern states experience extreme hot climatic conditions, southern states are not much vulnerable to such hot and humid weather conditions. Therefore Ikea should make furniture suitable for each climatic condition. In other words, they should introduce different types of furniture in Northern India and Southern India so that the needs of the people and climate are met. “Indian Furniture Industry is considered as a "non-organized" sector, with handicraft production accounts for about 85% of the furniture production in India” (Indian Furniture Industry, 2012). Ikea can definitely exploit this situation well. Since the furniture industry is not much organized, resistance to Ikea’s entry in India could be extremely weak. Moreover, furniture production in India uses the services of carpenters more and that of the machines less. Therefore, production costs of furniture in India are extremely high. On the other hand, Ikea uses machineries more and hence their production cost of furniture is less. In short, Ikea can definitely challenge Indian furniture manufacturers in terms of price and quality. So, they should give more emphasize to the pricing while formulating marketing strategies for India. There is no point in introducing luxury furniture in Indian market. Even if Ikea does so, they should make sure that luxury furniture are introduced only in the metropolitan cities of India. In the rural areas, they should introduce only the products with cheaper price. “Multinational companies have numerous positive effects on growth and development of the country in which they invest. These are primarily reflected in employment opportunities, fiscal benefits, transfer of technology, knowledge and skills, capital inflows and the like” (Primorac & Smoljic, 2011, p.169). In order to counter the resistance towards their entry, Ikea should spread the above message across India. As mentioned earlier, protests against foreign retailers are growing in India at present. At the same time, unemployment problems also growing gradually in India. Ikea should spread the message that they are capable of providing employment to a substantial portion of the unemployed people in India. Sustainable development is one of the core principles in the business circles at present. In other words, current consumers are interested only in dealing with companies which exhibit corporate social responsibility and keen in protecting the environment. Since Ikea uses plenty of wood for manufacturing furniture, protests against Ikea could be intensified in India. Destruction of forests and subsequent climate change problems are raising many concerns in the minds of Indian public. India failed to get the expected monsoon in this year and environmentalists argue that deforestation is the reason for that. Under such circumstances, it could be suicidal if Ikea tries to use woods from Indian forests for making furniture. They should make sure that they use only imported woods for the manufacturing of furniture in India. Communication is the bread and butter of the organizational world. In fact communication is the blood which gives life to an organization. In the absence of proper communication strategies, no organization would be able to communicate effectively with its stakeholders. “Communication is only successful when the intended result is achieved. This effectiveness is dependent on the choice of recipient, the clarity of the message and the choice of communication medium” (The importance of communication, 2009). Language is the most important in the business communication process. As explained earlier, India is a land of extremely diverse languages. For example, Keralites speak Malayalam whereas Tamil Nadu people speak Tamil. On the other hand Andhra people speak Telungu. Therefore, it is impossible for Ikea to use Hindi medium or any other common language to communicate with the entire Indian public. They should make use of regional languages when communicating with the people of a particular state or region. For example, they should display Malayalam television advertisements in front of the Kerala people and Tamil television ads in front of the Tamil people. Moreover, the services of local celebrities should be used while communicating with the people of a particular locality. Critical Reflection Global furniture market is undergoing rapid changes at present. It is not free from the consequences of the ongoing recession problems. Even though India as a country, tackled the recession problems effectively compared to other countries, Indian economy is currently facing some minor problems. For the first time in last few years, India’s economic growth has come down drastically in this year. Economists believe that the current dip in economic growth may continue unless the government take strong measures to counter it. Under such circumstances, this marketing plan may require lot of restructuring and revisions in future. India’s political climate is not so good at present. Even though the present Prime Minister Dr. Man Mohan is a strong advocate of liberalization, there is no guarantee that his party (Congress) may again win the 2014 political elections. If Congress fails to sustain power in 2014 elections, nobody can predict what policies the new government may follow from 2014 onwards. This marketing plan is written based on the current business climate in India. India is a country in which trade unions are so strong. Moreover left parties are in power in many of the Indian states. Leftist ideology always opposes the entry of foreign companies in Indian market. So, Ikea may face more protests than one would anticipates at least in some Indian states. Consumer behaviour in India is unpredictable. In some cases, Indians like to purchase locally made goods whereas in other cases, they go for foreign made goods. Domestic automobile company Maruti is the number one automobile manufacturer in India even though plenty of foreign automakers are competing heavily to destroy Maruti’s supremacy in Indian market. At the same time, Indians are very much interested in purchasing foreign mobile phones even though locally made mobile phones are plenty in number in Indian market. In short, an accurate prediction of the Indian consumer behaviour is extremely difficult. Even though India is believed to be rapidly developing, the living standards of the rural public have not been improved much. They still live in villages and streets. Therefore the demand for Ikea furniture in rural areas could be extremely low. In short, it is extremely difficult to predict the effectiveness of this marketing plan because of the huge fluctuations in Indian market and the rapid changes in consumer behaviour. References 1. Advantages & Disadvantage of a Joint Venture. N.d. 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