IKEA INDIA: EXPANDING TO SUCCESS

Abad, Clint C.
Cliano, Nicole Maureen M.
Gonzales, Charles Daven
Kitane, Kit Jannino T.
Nuñez, Goldamier C.
Sebayang, Guido Davin Haryo

BBA MANAGEMENT IV
Mgt 42-A
Brief Background of the Case
IKEA Group was founded in 1943 by Ingvar Kamprad in Smaland in southern Sweden. It
originally sold pens, wallets, picture frames, table runners, watches, jewellery, and nylon
stockings, and it introduced furniture into the product range in 1948. The company designs its own
items, and sells them in more than 415 IKEA stores that spread throughout approximately 49
countries worldwide. The IKEA Group vision was “To create a better everyday life for the many
people.” through offering home furnishing products at affordable prices for the masses.

In 1975, IKEA Group started its extended supply chain in India. They have been sourcing
for years from the country for their global stores. In 2012, it received foreign direct investment
approval from the government of India to set up retail operations in the country. It began by
opening an experience center in Hyderabad in 2017. It planned to open several stores across India
by 2025. However, in May 2017, Maeztu, the chief executive officer of IKEA India, was facing a
dilemma about the future success of the business in the Indian market, as major retailers are going
bankrupt.

Central Problem
Determining strategic actions that IKEA India should undertake to reach its goals and fulfil
its Indian expansion plan regardless of the complexity of the Indian Market.

Secondary Problems

 How can IKEA source more materials to support the incoming demand that will be
brought by its expansion?
 How can IKEA create the right policy framework and figure out a sourcing strategy
for determining the appropriate product mix, pricing and supply chain?
 How can IKEA adapt to constant changes in furniture designs?

Objectives
1. To address the problems of product availability, timely delivery, display of all types of furniture
in its stores, and customer service
2. To find local furniture suppliers that would meet IKEA’s quality standards
3. To set its product retail price in India lower than that of its rivals

4. To offer products that cater to the preferences mindset and aesthetic of key customer segments
in India
SWOT Analysis

Strength Weaknesses

 Brand value and reputation  Negative Publicity

 Democratic Design Concept  Cultural Differences
 Cost Consciousness  Control for standards
 Organizational culture (IWAY)  Scaleability
 Environmental Problems

Opportunities Threats

 FDI in single brand retail  Counterfeit

 Growth in internet usage  Indians are not a fan of the do-it (DIY)
 Formation of strategic collaborations culture
 Increasing emphasis on CSR  Giving an edge over its competitors

Strengths
1. Brand value and reputation
IKEA is the most valuable furniture retailer brand in the world listed in the 46th position
of the Forbes list in terms of brand value, valued at nearly $US 11.77 billion. The business
operates 415 stores in 49 countries and is present in the major world markets. More than
600 million customers visit IKEA stores every year.

2. Democratic design concept

IKEA has developed the notion of democratic design which implies achieving an attractive
form, quality, function and sustainability at a low price. Based on these five fundamental
principles, IKEA Democratic Design guides the development of every product, from the
original idea to the factory floor and into the store, all the way to the customer’s hands.
Very early on in the design phase, IKEA product developers and designers work with a
diverse team of technicians, manufacturers and specialists. This special partnership helps
keep their prices low and find the latest techniques to create new products according to
their standards.
3. Strong supplier and manufacturer relationships
A key part of IKEA’s success is credited to its communications and relationship
management with materials suppliers and manufacturers to get good prices on what it
procures. IKEA’s average time working with suppliers on a global level in 2017 was 12
years. The IKEA Group maintained strong supplier and manufacturer relationships to
develop efficient, cost-effective and creative products, as well as smart product design,
packaging and distribution.

4. Cost consciousness
IKEA designs unique products that incur low manufacturing costs while meeting strict
requirements for function, efficient distribution, quality, and impact on the environment.
According to a case study produced by The Times of London, more than 50% of the
products are made from sustainable or recycled products. IKEA seeks to use as few
materials as possible to make the furniture, without compromising on quality or durability.
By using fewer materials, the company cuts down on transportation costs because it uses
less fuel and manpower to receive materials and ship products.

5. Organization culture (IWAY)

The IKEA Way on Purchasing Products, Materials and Services (IWAY) is the IKEA
Supplier Code of Conduct. It comprises the IKEA minimum requirements relating to the
Environment and Social & Working Conditions (including Child Labour). IWAY is based
on the eight core conventions defined in the Fundamental Principles of Rights at Work,
ILO declaration June 1998 and the Ten Principles of the UN Global Compact 2000. IKEA
recognises the fundamental principles of Human Rights, as defined by the “Universal
Declaration of Human Rights” (United Nations 1948) and adheres to the United Nations
sanction list and European Union restrictive measures list.

Weaknesses
1. Negative Publicity

The company has been criticized many times for issues like poor treatment of employees,
questionable advertising practices or lobbying government authorities. Negative publicity
decreases brand reputation and customer loyalty.
2. Cultural differences

IKEA is a Swedish brand, founded by a Swedish entrepreneur named Ingvar Kamprad.

Indian people were different from Swedes, Germans, and French in terms of their behavior,
food habits and recreation. India was a country with more than 1.21 billion people with
different cultural and ethnic backgrounds. Juvencio Maeztu the CEO of IKEA India
worried if his European roots would stand in the way of IKEA Group’s expansion plans in
India. Before entering the Indian market, Maeztu and his team conducted a market research
study in India by visiting more than 500 homes to understand people’s needs and wants.
The research team entered local households; interacted with families in their kitchens,
bedrooms, and washrooms.
3. Control for standards

Ikea’s main concern is to keep the cost minimal but at the same time provide good quality
service and high product performance. This is not always possible. Ikea is known for
producing affordable, furnitures, but not all of the store’s offerings are shown to stand the
test of time. Firm’s cost reductions lead to decreasing product quality, which was followed
by higher number of products returned and damaged brand.

4. Scalability
The size and scale of its global business. This could make it hard to control standards and
quality. Some countries where IKEA products are made do not implement the legislation
to control working conditions. This could represent a weak link in IKEA's supply chain,
affecting consumer views of IKEA's products. The IWAY code is backed up by training
and inspectors visiting factories to make sure that suppliers meet its requirements.
5. Environmental Problems

IKEA needs to keep good communication with its consumers and other stakeholders about
its environmental activities. The scale of the business makes this a difficult task. IKEA
produces publications in print and online (for example 'People and the Environment') and
carries out major TV and radio campaigns to enable the business to communicate with
different target audiences.

Opportunities
1. FDI in single brand retail

The government of India recently allowed the 100% FDI (Foreign Direct Investment) in
single brand retail trade as it aims to attract investments in production and marketing, and
improve the availability of such goods for consumers. As IKEA is now in favourable
position, it would be a great opportunity for them to enter into the market since the
government is also open and willing to negotiate with multinationals that seeks to invest
into the country. However, there are certain conditions that need to be done like sourcing
of 30% of the value of goods purchased should be done in India, preferably from MSMEs,
villages and cottage industries, artisans and craftsmen, in all sectors.
2. Growth in internet usage

With over 460 million internet users, India is the second largest online market, ranked only
behind China. By 2021, there will be about 635.8 million internet users in India, and an
estimate of 43.8% digital buyer penetration in 2016 which results that online shopping is
also a popular online activity for Indian internet users. With such large usage of the internet,
the country would provide IKEA an additional cost-effective procurement strategy; a
greater opportunity in entering India.
3. Formation of strategic collaborations

Started in 2012, IKEA now has several ongoing partnerships with social entrepreneurs,
employing local artisans in vulnerable communities around the world. The social
enterprises that were partnered are mainly self-help groups and women-owned
cooperatives. Through IKEA, the social entrepreneurs can access a global marketplace,
giving them a strong foundation for self-sufficiency and independence. In connection,
IKEA would also gain a better reputation and morale for doing so.
4. Increasing emphasis on CSR

For IKEA, the need to stay at the forefront of the home furnishings industry means
attracting and hiring the crème de la crème of the design world, who are often millennials.
A Satell Institute commissioned study brings to light why Corporate Social Responsibility
(CSR) is becoming a crucial part of the furniture giant’s long-term recruitment strategy.
IKEA is learning that CSR activities are exposing new employees to new challenges, such
as mentoring and coaching young students in finding solutions for improving the quality
of life for senior citizens. These experiences are helping these new IKEA employees gain
perspectives and learn valuable skills that they can bring back to their regular jobs.

Threats
1. Counterfeit
IKEA’s low-cost business model has been imitated and copied by its rivals, which means
that the company needs to constantly innovate if it has to stay ahead of the competition.
For instance, several regional and local companies have caught on to the DIY bandwagon
and are also focusing on costs which means that to stay nimble and agile, IKEA has to
come up with newer strategies.
2. Indians are not a fan of the do-it (DIY) culture

Ikea revolutionised furniture buying in the West with its wide range of ready-to-assemble
products at affordable prices but many Indians would be forgiven for wondering why they
have to do it themselves. India’s abundant supply of cheap labour means it is not known
for its “DIY" culture. Ikea is aware that this may put people off so has teamed up with
 UrbanClap, an online platform that helps connect handymen with consumers. But analysts
say the absence of UrbanClap in lower tier cities could pose a problem.
3. Giving an edge over its competitors

Ikea is not the only multinational seeking a large share of India’s growing home goods
market, which research firm Forrester currently values at $40 billion. US retail giant
Walmart is betting big on the rise of India’s middle class too. The world’s largest retailer
recently agreed to buy a majority stake in Indian e-tailer Flipkart, which sells a wide range
of home furnishings. Ikea will have to contend with popular Indian online furniture retailers
Pepperfry and Urban Ladder as well in a fragmented and competitive market which also
includes a smattering of home goods options on Amazon’s local website. Ikea hopes that
its walk-in stores and famed restaurants, selling a mixture of Indian favourites like biryani
and samosas along with vegetarian versions of its famous meatballs, will give it an edge
over its rivals.

Alternative Courses of Action

ACA No. 1: Acquire the Godrej Interio

Advantages:

a. Gain a better position in the Indian market

b. Stronger competitive advantage in India
c. Increase in bargaining power
Disadvantages:

a. With a market value of $US 2.4 million, the acquisition would cost a lot.
b. Godrej Interio is already a major player of all organized retailers.
c. Already gained strong brand patronage from Indian customers
d. Increase in debt load
e. Culture and values that the other company established may clash
f. Running the risk of being redundant

ACA No. 2: Aim to double the suppliers to meet global and Indian needs
Advantages:

a. IKEA can achieve to produce more of their product portfolio in line with their expansion
in other states/territories in India.
 b. IKEA can meet the demands on Indian aesthetic and requirements in order to meet the
consumer’s preference.
c. IKEA can maintain its low-cost structure
d. Disadvantages:
a. IKEA India may experience miscommunication with their future suppliers that can lead
to surplus
b. The tendency of local suppliers not complying the supplier code of conduct, IKEA WAY
(IWAY)
c. The country may experience economic downfall that will lead to disturbance of
operations of IKEA India’s supply chain
ACA No. 3: Adopt a B2B business model by tapping with local real estate developers.
Advantages:

a. Help in raising brand awareness

b. Less costly
c. Beneficial for both the company and the real estate developers
Disadvantages:

a. A shift or diversion from their target market

b. This may cause a delay in their strategic plan of opening 2 stores in India by 2025
ACA No. 4: Keeping production costs low by partnering with local suppliers.
Advantages:

a. Attracts price-conscious buyers

b. Lessens the tax they are paying for imported products
c. Supports young social entrepreneurs
d. Provides labor opportunities
Disadvantages:

a. Discourages status-conscious class

b. Risk of inability to cover expenses
c. The tendency of local suppliers not complying the supplier code of conduct, IKEA WAY
(IWAY)
Recommendation
The group recommends the third and fourth courses of action. IKEA India opened its first
store in 2018. The group’s recommendation follows the 2019-2025 period and aims to open 25
stores by the end of it.

To meet the 30% requirement of Indian sourcing by 2023, IKEA should keep production
costs low by partnering with local suppliers. This way, IKEA would be able to support young
social entrepreneurs who conforms to the IWAY. They would also be able to maintain their low
pricing strategy since most of the supplies would no longer come from foreign companies.
To increase brand awareness, B2B marketing efforts would also commence by 2019.
Considering the broad coverage of India, pop-up stores would also be opened in 2019 and 2020 to
increase brand and product awareness.

The group anticipates that starting 2021, IKEA would be actively opening stores to reach
its 25-store target in 2025.

Conclusion
IKEA is one of those iconic brands that people either love or hate. Customers in Europe,
where it first started its operations love the cheap prices and the clean Scandinavian design
sensibility. The company is known for its modernist designs for various types of appliances and
furniture, and its interior design work is often associated with an eco-friendly simplicity.

IKEA has been present in India since 1975, and in 2012, they received foreign direct
investment approval from the government of India to set up retail operations in the country. In
August 9, 2018, IKEA India opened its first retail store in Hyderabad, with this, they aim to
continue expanding more. IKEA India’s expansion plan aims to set up 25 stores across the country
by 2025. However, this expansion plan has various challenges brought about by the complexity of
the Indian market.

Aligned with the challenges that IKEA is facing in the Indian market, the group formulated
four alternative courses of action. Among the three alternative courses of action the group decided
to implement two, ACA number 3 and ACA number 4. The group decided not to implement ACA
number 1 which is to acquire Godrej Interio because of the difficulties that are involved in the
transaction. Godrej Interio is a major player in both the home and institutional segments in the
furniture market in the country which remains unfazed by the entry of global furniture giant IKEA
since it believes that it has a greater feel of the Indian market.
 Furthermore, the group, as well, will not consider implementing ACA number 2 which is
to double the suppliers to meet global Indian needs because IKEA India may experience
miscommunication with their future suppliers that can lead to surplus. They also consider the
tendency of local suppliers not complying the supplier code of conduct, IKEA WAY (IWAY).

After thoroughly analyzing the case the group firmly believe that alternative courses of
action number three and four which is implementing a B2B business model by tapping with local
real estate developers and partnering with local suppliers will help IKEA India reach its goals and
fulfill the Indian expansion for the IKEA Group.