International Marketing for IKEA - Case Study Example

International Marketing for IKEA Name: Tutor: Course: Date: Executive summary This report aims to analyze the external and internal environment of IKEA in two foreign markets; Japan and the UK. Being markets in developed countries, IKEA is tasked with creating market objectives, segmentation, and targeting, positioning and developing growth strategies in these markets. Common environmental scanning tools used here include the SWOT (Strengths, Weaknesses, Opportunities and Threats), PESTEL (Political, legal, economic, technological, environmental and socio-cultural aspects) and Porter’s five forces. This report exploits all the three tools and attempts to compare the performance of IKEA in the two countries. The report starts with an introduction and market entry strategies which are followed by comparison based on the PESTEL model. SWOT analysis is then conducted on the two markets as well as Porter’s five forces. Finally, marketing objectives are outlined alongside the growth strategy. The report recommends that IKEA should provide world class customer service and furniture products to satisfy this market. Moreover, investing in new technologies will increase its performance among literate customers. Table of contents Executive summary 2 1.0 Introduction 5 1.1 Market entry strategy 5 2.0 PESTEL Analysis 6 2.1 Japanese Market 6 2.1.1 Politico-legal dimension 6 2.1.2 Economic aspects 6 2.1.3 Socio-cultural aspects 6 2.1.4 Technological aspects 7 2.1.5 Environmental aspects 7 2.2 UK market 7 2.2.1 Politico-legal aspects 7 2.2.2 Economic aspects 7 2.2.3 Socio-cultural aspects 8 2.2.4 Technological aspects 8 2.2.5 Environmental aspects 8 3.0 Porter’s five forces 8 3.1 Japanese market 8 3.2 UK Market 9 4.0 SWOT Analysis 9 4.1 Japanese market 9 4.2 UK market 10 5.0 Marketing objectives 11 6.0 Segmentation, targeting and positioning (STP) 11 7.0 Growth strategy 12 8.0 Conclusion and recommendation 12 References 13 Appendices 15 Financial performance FY 2010 15 1.0 Introduction IKEA is a Scandinavian multinational group of companies involved in design and sale of home accessories, appliances and furniture. Being a re-known furniture retailer since its establishment in 1948, it has expanded internationally to 36 countries in Europe, the Americas, Australia, and Asia. To understand the international marketing strategies used by IKEA, it is important to assess its external and internal environment using various tools. Some of the tools to be used include SWOT, Porter’s five forces and PESTLE model. The countries of concern in this case are United Kingdom and Japan which has seen huge IKEA presence. Strategic management at IKEA must have considered a number of issues which is specific to the target country and critical to the organization before making an international expansion intention. The increase in income among the middle class and the continued demand for high quality furniture products has increased the need for IKEA to capture and expand its market share. Moreover, host countries must present a favorable environment for investment with feasible return on investment, security of investment and high purchasing power among its consumers. Furniture and other household appliances are some of the common commodities that are of high demand especially with the growth of real estate business. Therefore, it is critical to understand the entry strategies and other valuable information that make the UK and Japan key target markets for IKEA products. 1.1 Market entry strategy Joint venture is the most suitable strategy for IKEA abroad (Wijers-Hasegawa, 2006). This strategy is appropriate for distance market that is often characterized by different cultures and languages. Evans and Bridson (2005) argue that joint venture is a fitting mode of entry due to psychic distance, for mass merchandize retailers. Being involved in a joint venture with a company in the host country reduces the financial risk and allows the retailer to obtain adequate research and planning before entry. A company may fail in the international market because of rush decisions or failure to understand the business and cultural differences that guide such decisions. Retailers who adopt standardized approaches are more likely to fail compared to those who adapt to the local environment. It is also important to involve a host company that already understands the local competition and technique requirements, nationalistic sentiments, and consumer behavior and government regulations. However, most joint venture agreements involve a lot of legal work, cultural training and management of conflicts arising language and nationality differences. 2.0 PESTEL Analysis 2.1 Japanese Market 2.1.1 Politico-legal dimension Political authorities in Japan introduced a corporate tax of 42 percent on business profits. Japan has one of the lowest tariff rates in the world at mean of 1.8 percent with paper, furniture and wood standing at 1.7 percent (The Heritage Foundation, 2016). Any imported toys and furniture that are below 200,000 yen attract 3 percent tariffs exclusive of internal and consumption taxes. Consumption tax for all imported and locally manufactured goods in Japan stands at 8 percent. Japan has a number of trade agreements with a number of countries but Norway is not among them. All products manufactured or imported have to be standardized and certified for compliance based on non-mandatory voluntary standards and technical regulations. Furniture products should comply with the Consumer Product Safety Law and Large-Scale Store laws. All goods should show measures and metric weights alongside shipping documents. Fortunately, the business model of IKEA is to make its furniture and other household goods locally which eliminate some of the trade restrictions and regulations related to imports. 2.1.2 Economic aspects Japan is one of the developed countries with a GDP of $4.92 trillion and per capita income of $36,633 (World Bank, 2015). In 2013, its growth rate was 1.6 percent and FDI inflows of $2.1 billion. It observes the rule of law with high degree of freedom from corruption. However, the country faces a mountain of public debt (246% of GDP) and challenges of ageing population. Unemployment rate in 2015 averaged 3.2 percent with some effect on wages where there are growing numbers of part-timers with no security. Falling oil prices have dragged down inflation. Retail sales have been down in the recent past due weakening consumption (-0.9% annual change in retail sales) among the population. Besides, IKEA will have to face a weak yen and movement of population to cities is influencing the demographics of Japan. 2.1.3 Socio-cultural aspects Japanese consumers have a strong preference for high-quality items going at premium prices. Since the 1990s, the consumers were searching for home development solutions and in the long-run their experiences and thoughts on retail products changed. In coordinated settings, consumer demand has grown given the varying consumer styles and higher life quality. Although the consumers have about 99% literacy rates and educated communities, they are unpredictable and inconsistent (Trompenaars & Woolliams, 2004). IKEA will have to meet the Japanese consumer desire for a small space living with two-seater sofas, sofa beds and storage boxes. 2.1.4 Technological aspects Japan has one of the best computer and internet technology in the world. With high levels of connectivity, consumers are able to search for information before making purchases online. Moreover, majority of citizens are acquainted with credit cards as well as debit cards which improves the country’s position in terms of distribution and payments. Due to high investment in research and development (R&D), the country has one of the highest improvements in technology, infrastructural development and ports (Madhogaria & Chaudhuri, 2006). IKEA will find it easier to ship raw materials to Japan given the effectiveness and efficiency of its port operations. 2.1.5 Environmental aspects Japanese are conscious on their environment. In 1971, Japan established the Environmental Act to control smoke emissions and soot emitted by industries and motor vehicles. In addition, the country burns more than two thirds of its wastes in industrial and municipal incinerators. Being the fifth biggest emission emitter globally, IKEA will be keen on energy saving and reducing use of air conditioners in offices. 2.2 UK market 2.2.1 Politico-legal aspects The British political and legal system is based on democratic principles and common law respectively. Compared to Japan, UK has lower corporate tax at 30% with minimal trade restrictions (UK Trade & Investment, 2015). By relying on local manufacturers, IKEA is able to sell at local market prices with low impact on its profits. 2.2.2 Economic aspects The UK has a well developed economy with GDP per capita of $43,770 and a GDP of $2.85 trillion making it the second largest in the European Union (World Bank, 2015). However, unemployment rate remains high at 5.4% which is a result of contraction of exports and deterioration of external sector. IKEA will take advantage of the high purchasing power parity of UK consumers to claim a significant market share. 2.2.3 Socio-cultural aspects As one of the European countries, the UK has low power distance and femininity factor. Consumers also desire high quality furniture products and do not insist much on the country of origin. With the highly literate and informed population, IKEA will be at task to meet the growing demand and the quality of British standards. 2.2.4 Technological aspects UK has well developed infrastructure such as airports, roads and telecommunications. Access to the markets is also good with the adoption of e-commerce as part of business. Many people possess credit cards and can order for goods online through eBay and Amazon.com. IKEA is up to the task in embracing new technologies to boost its business performance. 2.2.5 Environmental aspects The UK has strict anti-dumping laws and firms that pay high taxation are encouraged (Lewis, 2005). Pollution is a risk and leads to climate change, a phenomenon that is scrutinized by the Labour party. Again, IKEA will be concerned about dumping and pollution by creating systems and materials that are environmentally biodegradable. 3.0 Porter’s five forces 3.1 Japanese market Buyer power (High): Japanese consumers are unpredictable and inconsistent which implies that continuous research needs to be undertaken (Capell, 2006). They are also definite in tastes and preferences. They involve the entire family before making the purchase decision. Supplier power (Low): Most of the raw materials are located in the nearby Indonesia, Thailand, China and Vietnam at low cost. This aspect combined with low labor cost make them less competitive on price. Threat of substitutes (High): Interior designers and thrift stores are more developed in Japan and present real challenge to IKEA. They cover Peri-urban areas of Japanese cities which is also a prime market. Threat of new entrants (Medium): Given the low cost of situating business in Japan, a number of investors from China and US will be attracted to this market (Capell, 2006). However, the uniqueness of Japanese consumers will make the entry difficult. Competitor rivalry (Medium): Japan is more developed and saturated market which belongs to those who understand the needs of consumers. IKEA will be up to the task to ease some of its competitors like Karimoku, Fuchu and Maruni Wood. 3.2 UK Market Buyer power (Low): With the price guarantee policy of IKEA, UK consumers have little room for bargain or negotiation. Supplier power (Low): IKEA sources its materials from a variety of suppliers in Brazil and South Asia. With competition based on quality, the supplier power is low (Legg, 2015). Threat of substitutes (High): Interior designers and thrift stores also pose a great challenge to IKEA products. However, a number of customers still prefer the natural wood over composite wood products. Threat of new entrants (High): The openness of the UK government to foreign trade encourages a number of investors in furniture products (Kotler & Keller, 2006). Besides, the low-end furniture market serves the middle class and encourages more Chinese and Indian investors to come in. Competitor rivalry (High): The number of dwellings in the UK has contracted in the past decade with minimal expansion (Collinson, 2013). IKEA competitors will find hardships in operating in a more saturated market. 4.0 SWOT Analysis 4.1 Japanese market Strengths: The Company has stable financial performance and adequate funds for research and development. Moreover, its employees are well remunerated and provided with excellent working conditions. The company is also flexible to cultural and design changes making it adaptive to new environments (Sousa & Bradley, 2006). Besides, the firm is well organized and specialized in furniture making it a core competency area. Weaknesses: The initial expansion policies were not up to standard did not consider a number of variables in the destination country. With low pricing models, Japanese consumers may consider some of the furniture as low quality. Failure to visit and understand the Japanese families were IKEA’s undoing in the first entry of 1974 (IKEA Group, 2008). Opportunities: Increasing number of middle class and up market consumers improves revenue performance for IKEA. These families desire a small space living which also demands for fewer products and raw materials per family (IKEA Group, 2011). Ongoing negotiations for free trade agreements with the EU and Latin American countries may reduce cost of shipping raw materials. Threats: Demand for greater accountability and treatment of employee soars the cost of production. Similarly, Japanese industries and regulations require that their model of lean production and total quality management be followed (Baraldi, 2008). Entry of big time local competitors threatens the profitability of IKEA. 4.2 UK market Strengths: Excellent management board and higher wages for employees gives then a huge incentive to continue working. Moreover, involvement of strategic managers and good financial base provides the company with a competitive advantage in Europe (IKEA Group, 2011). Again, the brand reputation and image is very high given that the market presence is equivalent to that of a strong brand. Weaknesses: There is little room for breath where the board of directors pressurizes the tactical managers on its expansionary policy. The managers want the goals met without proper mechanisms to attain success. Low prices of furniture are perceived by the middle and the high end market as poor quality which dampens the brand. Opportunities: The UK market has great connectivity and greater use of information technology. The level of banking and funds transfer systems are excellent which makes it easier for customers to transact online and order deliveries (Dahlvig, et al. 2003). With e-commerce being the next frontier, it becomes easier for IKEA to trade with UK neighbors like France, Germany and Ireland. Threats: The UK is holding a referendum to exit for the EU. This has greater ramifications on trade and investment. Some real estate investors may choose to withdraw for the UK which reduces the number of furniture customers in the UK. 5.0 Marketing objectives The mission of IKEA is to provide a broad range of functional and well-designed home furnishing products with reasonable pricing. By doing so, it maximizes the value chain and establishes strong brand image and long-term customer relationships (Harapiak, 2013). The objectives are; To increase revenue margins by 50 percent in the next two years To double customer retention rate and acquisition in the next one year To increase loyalty and reach by 30 percent in the next one year To expand to various social media platforms within the next one year 6.0 Segmentation, targeting and positioning (STP) IKEA segments its markets base on geography, demographics and psychographics (Kotler & Keller, 2006). Geographical segmentation relates to markets such as Europe, Americas, Asia, and Australia. Demographics involve segmenting by family type, age, occupation, income levels and marital status. For example, IKEA segments the market as over 45 years, 21-45 years and below 21 years in the UK market. On the other hand, psychographics segment the market base on lifestyles, tastes and preferences of consumers. For instance, IKEA prefers selling to customers with fine tastes, high level of exposure and preferences for quality. In targeting, IKEA uses a number of marketing mix and customer targeting strategies. In the UK, the target customers are 21-45 year olds with low-middle income and have one or two children. The products are large sofa sets, beds, wall units, cabinets and kitchen furniture. The product prices are in the range of £199-4,999. Psychological pricing and bundle pricing are used in this market. Promotion modes are social media, TV and newspapers such as Daily Mail and BBC. Distribution is done through trucking and online deliveries to the doorsteps of UK consumers. In the Japanese market, the target market is customers aged 20-40 years of middle and high income living in suburban areas. Most homes are cramped and require small tables, beds and sofas. Cost-based pricing is appropriate in the Japanese case as an adaptation strategy. For example, a sleeping couch can cost 51900Yen in Japan and the same model costs 3195 Yen in Sweden. Megastores are suitable in Japanese cities with a lot of parking space, restaurants and child-care areas (Harapiak, 2013). Self-assemble and flat-packs are recommended. In terms of promotion, showrooms and TV commercials are advisable to solve market-related problems in Japan. Positioning strategy for IKEA products is to develop quality products that meet the needs of consumers at affordable prices. Quality for money is the positioning strategy for IKEA in Japan and the UK. Pricing and quality are two important aspects of IKEA positioning. 7.0 Growth strategy First, originality and uniqueness of ideas was important in IKEA’s international success. Secondly, cost control and building of long-term relationships was necessary to increase customer acquisition and high customer retention. Third, both Japanese and UK markets can be evaluated as True Friends under the customer relationship group framework. Improving promotional strategies, developing mobile applications and improving IKEA website will increase customer retention and customer acquisition (Harapiak, 2013). 8.0 Conclusion and recommendation IKEA has a good strategy and plan to venture abroad with minimal challenges. Low costs and high profitability is one aspect the company is looking at by performing environmental scanning using a number of tools such as PESTEL, SWOT and Porter’s five forces. UK and Japanese markets are mature and saturated and require furniture firms with greater inclination to quality and premium pricing. IKEA should provide world class customer service and furniture products to satisfy this market. Moreover, investing in new technologies will increase its performance among literate customers. References Baraldi, E. (2008). Strategy in industrial networks: Experiences from IKEA. California Review Management, 50(4): 99-136. Capell, K. (2006). IKEA’s New plan for Japan. Cited from (01.05.2009) http://www.businessweek.com/globalbiz/content/apr2006/gb20060426_821825.htm. Collinson, P. (2013). UK standard of living rises to fourth highest in EU. Available: http://www.theguardian.com/money/2014/dec/11/uk-living-standards-eu. Last accessed 8th NOV 2015. Dahlvig, A., Kling, K. & Goteman, I. (2003). Ikea CEO Anders Dahlvig on International Growth and Ikea’s Unique corporate culture and brand identity. The academy of management executive, 17(1): 31-37. Evans, J. & Bridson, K. (2005). Explaining retail offer adaptation through psychic distance, International Journal of Retail & Distribution Management, 33(1): 69-78. Harapiak, C. (2013). IKEA’s International Expansion. International Journal of Business Knowledge and Innovation in Practice, 1(1): 25-51. IKEA Group Corporate sites n.d., IKEA Timeline. Retrieve April 29, 2008, from http://www.ikea-group.ikea.com/?ID=43. IKEA Group. (2011). Welcome inside: Yearly FY10. Inter IKEA Systems Publishing. Sweden. Kotler, P. & Keller, K. (2006). Marketing Management. ( 12th edition). United states of America: Pearson Prentice Hall. Legg, J. (2015). FIRA's statistical overview of the UK furniture industry.Available: http://www.furnitureproduction.net/resources/articles/2015/02/1013896220-firas-statistical-overview-uk-furniture-industry. Last accessed 8th NOV 2015. Lewis, E. (2005). Great brand stories. Great IKEA! A brand for all the people, Cyan Communications Limited 2005. Madhogaria, R. & Chaudhuri, S. (2006). IKEA in Japan: The market entry strategies. IBS Case Development Center. Sousa, C. & Bradley, F. (2006). Cultural Distance and Psychic Distance: Two Peas in a Pod? Journal of international marketing, 14(1): 49-70. The Heritage Foundation (2016). 2016 Index of Economic Freedom in Japan. http://www.heritage.org/index/country/japan. Trompenaars, F. & Woolliams, P. (2004). Marketing across cultures, Capstone Publishing Ltd, Chichester, England. UK Government (2008). Unfair contract terms guidance. Available: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/284426/oft311.pdf. Last accessed 8th NOV 2015. UK Trade & Investment. (2015). Billions of pounds in UK-China business deals agreed at business summit. Available:https://www.gov.uk/government/news/billions-of-pounds-in-uk-china-business-deals-agreed-at-business-summit. Last accessed 8th NOV 2015. Wijers-Hasegawa, Y. (2006). Sweden’s IKEA back in Japan after 20-year hiatus. Cited from ( 30.04.2009) http://search.japantimes.co.jp/cgi-bin/nb20060425a1.html. World Bank. (2015). China overview . Available: http://www.worldbank.org/en/country/china/overview#1. Last accessed 8th NOV 2015. Appendices Financial performance FY 2010 Read More