Global Corporate Marketing Strategies for IKEA - Case Study Example

Global Corporate Marketing Strategies of the of the Contents Contents 2 Introduction 3 PESTLE Analysis 3 Consumer Analysis 5 Customers 5 Choice Criteria 5 SWOT Analysis 6 Market Entry Strategy 7 Recommendations 8 References 10 Introduction IKEA is one of the world’s largest mass market retailers engaged in furniture business. The company specializes in selling furniture inspired from the Scandinavian style and other items related to home furnishings in nearly 42 countries in more than 345 stores (IKEA Group, 2013a). IKEA was incorporated in 1943 at Sweden and has continued to grow based on two important principles, namely cost reduction and culture design. Despite economic downturn in the global markets, IKEA has been able to maintain its robust financial performance. In 2012 alone, profits had risen by 8% estimating to €3.2bn. Worldwide sales of the company had risen by 9.5% with an estimated value of €27bn. This rise in sales could be attributed to fast expanding markets in Russia, Poland and China (IKEA Group, 2013b). This paper takes up the case of IKEA’s expansion in South Africa so that the company can capture more international markets. It is believed that South Africa can provide immense opportunities of expansion for IKEA. PESTLE Analysis PESTLE analysis is a useful tool that can be used to analyze the macro-environmental conditions by considering major variables that have the potential to affect a business (Bartucca, n.d.). It helps in evaluating actual and potential factors that can alter objectives of a company. This section considers the political, economic, social, technological, legal and environmental factors, which can affect IKEA in South Africa. Political: Presently, the government of the country is stable and has adopted market oriented policies in order to attract foreign investors. In 2013, FDI flows in the country have more than doubled to $ 10.8 billion (Sulaiman, 2013). The Greenfield investment in consumer goods was the major reason for this rise in the investment drive. One of the recent developments on the country’s political front was the decision to join the BRIC countries, indicating that it is one of the fastest growing markets of the African continent (Government Communications, 2014). The government has modified the corporate tax system to attract more investments. The taxes on non-residential companies have been reduced to 33% from 35%. Non-resident companies are taxed only on income derived from South African sources. Economic: The annual rate of GDP growth in South Africa was 3% in 2012 from the previous year. The GDP per capita of the country had improved from $ 5810 in 2011 to $ 5879 in 2012. However, unemployment rate in the country has increased from 23.8% in 2011 to 25.2% in 2012 (CIA, 2014). The first two variables imply bright business prospects for IKEA in South Africa. Rising unemployment in the country can put pressure on IKEAs business operations as it lowers consumer’s purchasing power. The country is currently ranked 64th in terms of setting up a business, which is better than Russia (that ranks 88th) where IKEA has already established its business (The World Bank, 2014). Socio-cultural: The personal disposable income of South Africa has increased from 2145156 ZAR Million in 2013 to 2112178 ZAR Million in 2014 (CIA, 2014). This can prove to be advantageous for IKEA if it enters South Africa as consumers will have higher purchasing power to buy its products. Apart from this, rise in the per capita income of the population implies that the standard of living in the country has improved and consumers’ expenditure on luxury foreign brands has also increased substantially (Smith, 2010). Increasing growth of new businesses in the country is in turn boosting demand for furniture, which will also prove favourable for IKEA (South Africa, 2007). Technological: Technological developments are important for retailers in the sense that use of advanced electronic gadgets and web based technology has a huge potential to impact the number of purchases made by consumers. IKEA stores mainly operate on wireless devices, electronic shelf-labelling and self-checkout machines. Though the ICT technology sector in South Africa is not a leader, yet it is a fast adopter (Shah, Bambuwala & Rohera, 2013). Internet usage in South Africa has increased by 25% in 2012. Internet penetration has increased by 20% and 7.9 millions of the population accessed internet on their mobile phones. These factors will contribute towards increasing the e-business sales of IKEA in South Africa (Sullivan, 2012). Legal: As per the Companies Act 2008, it is mandatory to ensure that notice of incorporation and the Memorandum of Incorporation for companies are registered as legal entities. Foreign investors are given equal importance as local investors. The present legislations require a foreign company to either establish itself as a separate entity or a branch office as an external company (UHY, 2014). Apart from these factors, bureaucracy and corruption can also be treated as important determinants of conducting business. The corruption perception rank of South Africa is 77, while that of Russia is 127 (Transparency International, 2014). This implies that corruption in South Africa is lesser than that in Russia, where IKEA already operates. Environmental: The government has passed the Integrated Pollution and Waste Management policy in 2000 and since then, increasing efforts are being taken to reduce waste generation from industrial production. This means IKEA needs to take additional care regarding the production process and lower harmful effects on the environment. IKEA must act in a socially responsible manner. Consumer Analysis Although IKEA offers furniture to all groups of customers, the company has built a strong reputation in producing standard products for the middle and lower income groups. This is because the company is able to produce contemporary home furnishings at a reasonably lower cost. However, the products are of superior quality (Chu, Girdhar & Sood, 2013). Customers The market for furniture in South Africa is quite well-developed and there are a large number of potential customers. The three main categories, as per customers’ demand, are office furniture, upholstered furniture and kitchen furniture. This provides opportunities for IKEA to start its business in South Africa (Mokonyama & Kistan, 2008). Choice Criteria Figure 1: Variables affecting choice (Source: Jobber & Ellis-Chadwick, 2013) The above table summarizes the choice criteria for customers, which is prepared based on the framework of Jobber and Ellis-Chadwick (2013) who had pointed out that consumers are influenced by multiple attributes while buying products. These factors can provide a guideline for IKEA while understanding consumers when they enter the South African market (Jobber, D. & Ellis-Chadwick, 2013). Technical Comfort, durability and convenience are the three most important factors, which will play a major role in determining success of IKEA in South Africa. Economic Among the major economic variables, price and value for money will be the most important determinants. This is because IKEA mainly produces low cost furniture, which is reasonably priced and of high quality. This will be advantageous for IKEA (Suarez, 2006). Social Social belonging and fashion will be essential for IKEA as majority of the population is black. Personal Personal variables are difficult to predict as there is involvement of psychological factors like, emotions, in the buying decision. SWOT Analysis The SWOT analysis is the best way to comprehensively present the internal and external factors, affecting growth potential of a company (Venkatesh, 1995). Strength: The key strength of IKEA can be summarized into three factors. Firstly, low cost architecture of the company emanating from the vast economies of scale. Secondly, strategic positioning of the sourcing materials by placing them closer to the supply chain, which has further reduced the operating costs (Kaye, 2013). Thirdly, brand loyalty enjoyed by the company has also contributed effectively in retaining customers across the world (Roger, Grol & Scoch, 1998). IKEA also provides online shopping facilities and the statistics of internet usage in South Africa shows that 90% of the consumers access internet from cell phones, which enhances chances of sale for IKEA (Fulbright, 2014) Weakness: Quality control of furniture has become a formidable problem for the company as it has been often complained that product quality was inconsistent. The company has also been in news recently for signing unfair trade deals with suppliers in an attempt to reduce costs. This has negatively affected quality of the products (The Times Newspaper, 2009). Opportunities: IKEA can mainly target the second and third category of furniture as it mainly produces these two categories. People in South Africa appear to stay in relatively small houses compared to the European countries, which will require IKEA to design stylish, but small furniture (CSIL, 2010). Additionally, it has been observed that the government has simplified the process of applying loans for houses and renovation, which has raised the number of applicants for loans by almost 34%. Loans for renovations accounted to 25% of the total housing loans. Labour costs of South Africa are also considerably lower compared to other countries of the emerging economies. The country plans to invest 1.5 billion pounds in renewable energy and use solar panels for reducing carbon footprint. This is in line with the environmental cleaning strategy of the South African government. Threats: Mr. Price is a retailer in South Africa, which sells similar products therein and will be one of the major threats to IKEA’s operations. Apart from this store, there are several established stores serving similar quality products for the middle and lower income groups. It has been reported that furniture manufacturers in South Africa has lost jobs due to cheap imports made from foreign suppliers (Leading Architechture, 2014). Market Entry Strategy In the past few years, IKEA has managed to create a process of successful internationalization through setting up franchises, joint ventures and wholly owned subsidiaries. The company has adopted its mode of entry for different markets. For instance, in China, IKEA had entered by setting up a partnership with a local company. In the U.S.A., the company had entered by setting up a wholly owned subsidiary (The Observer, 2005). It will be useful for IKEA to use its experience in China to enter into the South African market. Setting up a joint venture with one of the leading suppliers of the market will prove beneficial. This action should be taken in order to analyze local tastes and preference of the consumers, along with cultural difference between the countries (Isaksson and Suljanovic, 2006). Once the company is able to gain strong foothold, it can then expand within the country by establishing wholly owned subsidiaries. This process is likely to reduce the amount of risk to be faced by the company. This is because the need for furniture in a country is strongly dependent on its social and cultural forces. IKEA has learned from its experience in the U.S.A. that neglecting cultural forces in marketing can lead to market failure. Also, risks involved in the joint venture is less as both the partners take equal responsibility for risks involved in the investment. Additionally, resources can also be shared by both partners in business. Pooling of resources will provide a boost to the company’s resource base. However, it must be mentioned that very strong cultural difference between nations hinders in integration of corporate culture in companies and creation of standard products (Ubidia, 2013). IKEA must take this factor into consideration before setting up its joint venture. In terms of legal requirements of the country, it can be found that setting up of a joint venture is considerably easier due to cost benefits, compared to a wholly owned subsidiary. Recommendations South Africa can be one of the most promising destinations for IKEA to enter for a variety of reasons. The political and legal requirements of the country coupled with social and environmental factors present favourable conditions for IKEA to enter into the South African markets. It is suggested that IKEA employ joint venture as a mode of entry in the South African market because previous experiences have shown that wholly owned subsidiaries can pose considerable risk to business. One of the important factors that should be considered by IKEA in South Africa is local taste and preference of the consumers. IKEA can use its brand image to capture the new market. Furniture market in South Africa is a highly competitive one and this can pose a threat to IKEA. However, there are two major factors which can prove to be beneficial for IKEA namely the low cost of the furniture and the global brand image of the company. The rising population of South Africa and increasing demand of houses is likely to raise the demand for furniture in the country. Additionally, the rising disposable income of the people and the new businesses set up in the country will also cause additional demand for furniture. The existing strength of the company in terms of its cost advantage and its loyal base of customers and the strong opportunities of business expansion in South Africa are also factors that will help in growth of IKEA. These factors provide huge business potential for IKEA and it can be concluded that IKEA will benefit by entering into the fastest growing economy of the African continent. References Bartucca, N. (n.d.). Contemporary Marketing Strategy. Middlesex University. 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