IKEA in CHINA

Global Marketing Management

ARU Student Number - 1251155 LCA student Number (please state both) – 305995/406774 Module Title – Global Marketing Management Assessment mid - Final Lecturer – Sandy Deshpande Due Date: 12/01/2015

Statement of Authenticity I hereby confirm that this assignment is an original piece of my own work which makes full use of appropriate style Harvard Referencing to acknowledge all sources of information used in its compilation. I also confirm it has not been submitted to another Institution for academic purposes. I understand that assignments will not be accepted for marking without a completed form.

Signature – Roona Desai

Name: Roona Desai

Date: 11/01/2015

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Global Marketing Management

Executive Summary IKEA is a global brand and a very well established company. IKEA is one of the largest furnishing retail chains and was founded in Sweden in 1943. The mission of IKEA is “to offer a wide variety of home furnishings of good design and function at prices so low that the majority of people can afford to buy them” and the vision is “to create a better everyday life for many people” (Raju, 2004). IKEA’s main driving force is to provide customers with trendy functional products with minimalist lines which are manufactured co efficiently with suppliers (Hill & Jones, 2005). IKEA targets working class, there are 351 IKEA stores spread over 43 countries. IKEA decided to expand its company and going abroad is a necessity, as the world’s largest furniture retailer, IKEA is very popular for its ready to assemble furniture and its architectural designs on furniture (Oliver, 2013).

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Global Marketing Management

Table of Contents Introduction............................................................................................................. ..........4 MICRO and MACRO factors PESTLE Analysis....................................................................................................4 SWOT Analysis.....................................................................................................5 Porter’s 5 forces..................................................................................................6 Strategies.............................................................................................................8 Value chain model of IKEA..................................................................................8 The Marketing objectives.................................................................................................9 Business Strategy............................................................................................................10 Corporate strategy..........................................................................................................11 Business Model...............................................................................................................12 The Marketing tactics.....................................................................................................13 Recommendations................................................................................................... ......14 Conclusion............................................................................................................... .......14 References............................................................................................................... ......15

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Global Marketing Management

Introduction IKEA is a Sweden based company internationally well known furniture brand; it was founded in 1943 and has grown rapidly since then. Today it is well known for its Scandinavian designs and is believed to be world’s largest furniture retailer. IKEA is very well known in the market for its amazing flat pack furniture, ready to assemble by the customers at home. This has allowed IKEA in reducing their price and has managed to survive at a low cost. IKEA carries a variety of products which includes home furniture, office furniture, accessories etc. All the range are all year available in the stores as well as available online. Low pricing is the strategy for IKEA and has a vision to create a better everyday life for many people across the world (IKEA, 2012) PESTLE Analysis Social – Social culture environment includes the beliefs, lifestyle of the people, their behaviour, taste etc. Consumer preference, condition and the purchasing pattern under which the products can be sold are directly affected by social cultural changes (Scherrer et. al., 2003) Chinese tend to spend most on their living rooms, most of the living rooms contain dining table as Chinese kitchens are build small therefore Chinese spend less on Kitchen furniture. Hence IKEA provides more on living room furniture. IKEA offers flat pack furniture where customer assembles themselves. The DIY products are appreciated in West of China as customers know they save money by assembling the

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Global Marketing Management furniture also many customers enjoy assembling the flat pack furniture. But the parts of China where labour is cheap the DIY concept didn’t work well (Bhasin, 2012). Technology – IKEA offers value added services; IKEA catalogue utilizes its mobile app to provide added services with an augmented reality feature to give consumers a virtual preview of the furniture in a room and allows for a digital test run of brand name products (Olenski, 2013). Economic – Economic factors are those factors that affect the consumer buying power. According to Rankin (2014) IKEA’s sales has driven up by growing Chinese middle class, IKEA has reported 3.6% sales rise into Chinese market. The middle class people have loved IKEA’s flat pack furniture designs and discrete Scandinavian design. The GDP in China was worth 9240.27 billion US dollars in 2013 (The Guardian, 2014). China is the second largest economy in the world (Bloomberg, 2011). Environment – IKEA is very much concerned about its environmental policy. The brown cardboards and the company trumpets IKEA uses make the product cheaper and is environmental friendly. The flat packs also mean that they will cut down space and can store more furniture in one time transportation (Salisbury, 2011). Bamboo has more than thousand species, strong and lightweight bamboos can be used to create a hardwood effect and also environment friendly. IKEA also uses wood plastic composite, flax & linen, recycled PET plastic etc (IKEA group, 2012) Political and Legal – The biggest difficulty for IKEA when entering China was the legal systems and trade barriers. At the early stage IKEA’s presence into Chinese market was entirely procured with most of its purchases of goods from other store deriving from China. IKEA opened its first retail store into Chinese market as a part of joint venture with Beijing Northern Sweden limited company as during that time it wasn’t allowed for the foreign companies to build their own stores (Wang, 2011). SWOT Analysis

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Global Marketing Management STRENGTHS WEAKNESSES Famous brand name and strong positioning in IKEA has limited advertising the global market (Kumar & Kumar, 2010) promotional strategies

and

Good quality and its value for money

IKEA introduces differentiated products but the competitors and competing tight into Economies of scale because of its bulk Chinese market (Times, 2010) purchasing (Dugher, 2012) Product development and differentiation (Daniel & Fredrik, 2011) OPPORTUNITIES THREATS China is vast furniture demand market IKEA has its imitators in China IKEA should focus on Social responsibility The Chinese economy is gradually slowing this will enhance Chinese people to buy down, the disposable income has been IKEA furniture reduced (The world bank, 2014) To expand more into Chinese market as the majority of Chinese furniture stores don’t have floor space to let their customers thoroughly try out the product (hatton, 2013)

Porter’s 5 forces Porter’s 5 forces is a generic framework that deconstructs industry structure into five competitive forces (Nemati and Barko, 2004, p29) Buyer Power: IKEA is currently performing well in the Chinese market; according to the CEO of IKEA group China is going to be the second largest market place for IKEA in the world (Oliver & Philip, 2013). Chinese customers always expect high quality but also with low price. When IKEA entered first into Chinese market even though the price was less compared to other countries still IKEA had to reduce its price as Chinese couldn’t afford to buy. Therefore there was a chain reaction in value chain which forced IKEA to reduce costs. Thus the uniqueness has made IKEA to beat its rivals (Tian, 2007). Supplier Power: IKEA suppliers and good relationships with them is the greatest asset. IKEA has suppliers in more than 50 countries however 21% of them are established in China 6

Global Marketing Management (IKEA group, 2012). IKEA has their own manufacturing companies, Swedwood manufacturer which manufactures its own designs. Thus suppliers has less bargaining power and so are obliged to meet the demand of IKEA (Swedwood, 2009). Competitive rivalry: This is industry is highly competitive as there are other firms who offer at low price though not the same quality. As there is a high competition worldwide IKEA chose to establish in China however the Chinese market holds the highest competition (Enquist & Edvardsson, 2009). Goods are imported from China due to cheap labour and intense competition. Substitution: Threat of substitution is quite high in China as now days many manufacturers copy the furniture designs but also they copy the layouts etc. For example in Kunming, a store named 11 Furniture has copied IKEA’s blue & yellow colour scheme, mock up rooms, signage as well as the furniture designs (Lee, 2011). Barriers to Entry: In the country like China there is little threat for new entrants entering the market, investment is not substantial also economies of scale can be used easily. To compete with IKEA the competitor should be able to invest in big amount and should select the suitable locations to establish.

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Global Marketing Management

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Global Marketing Management Marketing Objectives IKEA is known globally for its innovatively designed furniture. In the year 1998 IKEA started its retail operations in China. IKEA formed a joint venture. IKEA understood well the local needs and adapted strategies accordingly. Marketing plays a vital role in order to expand the business. IKEA has to follow a SMART marketing objective which means IKEA has to be Specific, Measurable, Achievable, Realistic and Timebound. IKEA’s marketing Strategy is different in different countries, if we consider Sweden and China it highly differs in terms of culture and institutional setting The marketing objectives for IKEA are:       

Create awareness of its brand Maintaining or increasing the market share Customer satisfaction Positioning in the Market Brand Management Achieving and advantage over its competitors Distribution channel

Create awareness of its brand In China the preference for internationally well known brand is still rising, according to frog’s survey of Chinese consumers found that 63.5% of participants prefer foreign brand, participation in social media should help IKEA to create is brand awareness (Meulen, 2014). IKEA has three distinct features and customers could review those features which are function, quality and low price (Kling and Goteman, 2003) before making their purchases. IKEA’s advertising and promotion is dominated by the catalogue. Maintaining or increasing the market share Chinese apartments are structured small and so IKEA had a collection of such furniture which would easily fit into Chinese apartments. They also focused on the store layouts by having a balcony as all Chinese apartments have balcony’s also all houses in China has got a hallway leading to the living room so more hallway furniture were available for the customers (Brown, 2013). 9

Global Marketing Management Customer Satisfaction At the beginning when IKEA entered Chinese market it was not successful due to the economic environment in China, the prices were high and Chinese could not afford. IKEA followed a unique marketing strategy where IKEA manufactured products and the raw materials were bought locally thus they saved money and reduced the furniture prices so that Chinese people could afford them (Burt et. al. 2008). China has a culture with a high power distance, there is huge difference between social status of people living there and status symbols are very important, IKEA should follow collectivist culture as family is very important in China (Hofstede, 2001). Positioning in the Market IKEA targets different group of people in the market, the main target is female customers which is 65%. According to IKEA women stand for change and they welcome change (Burt et. al. 2008) Brand Management It is very essential to keep up brand management. IKEA is a well known furniture brand and thus they have to focus on their quality of furniture they sell and also in affordable price that Chinese market could afford it. IKEA has introduced a loyalty card programme called “IKEA family” can be used to get discounts on special range of products Achieving and advantage over its competitors IKEA offers furniture at low price, to cut the transportation cost, IKEA uses flat pack furniture where customers assemble the furniture at home. IKEA signs long term contracts with its suppliers and IKEA gets its wood locally from China. IKEA also supports its suppliers by providing financial assistance, thus there is a unique business opportunity for IKEA in China (Samie et. al. 2004).

Distribution Channel

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Global Marketing Management IKEA publishes annual catalogue, the first catalogue was published in Sweden 1951, the catalogue is now published in more than 55 editions in 27 languages and 36 countries and is considered to be the main marketing tool for IKEA.

Develop and Recommend Business Strategy A very important key for a Business is to plan a business strategy. IKEA is all over the world however there all stores have some or the other strategy to run their stores.

(Porter, 1998)

Each of the mentioned above generic strategy has target to competitive advantage, the cost leadership strategy

and look

differentiation for

competitive

advantage while the cost focus will aim its advantage over cost. Cost leadership is clearly talks about costs that IKEA should focus on their expenses and should try to reduce their cost by applying different tactics. For IKEA it would be better if they get wood from local traders of a good quality so that it won’t affect its brand image similarly that will help IKEA to reduce its cost of getting wood from Sweden or from other country. Into the Chinese market IKEA has to be unique and should be appreciated by the customers, differentiation is based on the products IKEA is offering and how they differ from local traders (Porter, 1998).

Develop and Recommend Corporate Strategy

There will be various strategies which will be followed by the company in order to run their business and to achieve sales target. The senior executive of the company will be the one who will be responsible for the strategies to plan. IKEA will be using Ansoff Matrix to help in deciding the choice of corporate strategy. 11

Global Marketing Management

(Source – Google Doc)

If we see Ansoff Matrix chart above its simple to classify that the business fall under diversification and its means new product in new market. Even though in China there are many other businesses which imitates the designs very easily but also IKEA gives tough fight by selling at low price without any compromise with the quality. Thus IKEA has to carry out risk assessment to outline the threats and opportunities in the new market. Business Model IKEA has studied both macro and micro conditions of Chinese market. According to Hofstede’s cultural dimensions China has a culture of high power distance and long term orientation (Hofstede, 2001). IKEA has framed certain objectives and has planned a business model. IKEA has combined a strategy of low price and to provide better delivery and assembling service to its customers in China. IKEA’s current business model is its flat pack furniture. According to The Telegraph (2014), IKEA proves flat pack furniture works around the world; Sales went up by 5.9% in China. IKEA is believed to be the one of the most reliable stores for the consumers as it has 300 stores in 26 countries, considering strongest growth was in China. IKEA has also achieved its brand recognition due to its value delivered. IKEA’s focus is on flat pack furniture and to deliver with a good quality and affordable price. There are 3 major advantages that why IKEA has targeted to expand their business with flat pack furniture and they are Cost, Selection and Easier to transport. One of the main reasons for IKEA to target flat pack furniture is its cheap and also the factory which was providing wood is in Nantong (Fangfang, 2013). It also gives you a wide choice for selection which means not necessary to buy a matching set of furniture and very important is easy for 12

Global Marketing Management delivery, it’s conveniently boxed such that it can be deliver easily as flat as a book and also easy to carry in the back of your car (Smithers 2013). IKEA gives out opportunity to Chinese customers to try their sofas and beds before they buy and consumers in China spends hours once they visit the store however not all the Chinese stores have this strategy to let their customers try and feel the comfort. IKEA also focuses on service strategy that how they serve their customers, for example in their stores they just don’t sell furniture but they create a dreamy house that this is how the kitchen should be or the living room should be built. The marketing tactics which IKEA uses into Chinese market are: STP Model: IKEA has planned strategies to survive in China and within the economy of china, the very important elements of marketing are segmentation, targeting and positioning in the market. IKEA can differentiate market segments on the basis of demographic and geographical characteristics (Lim et. al. 2006). IKEA targeted to open its first store in Shanghai and operated as Joint Venture. With the strategy of selling furniture at affordable price they also focus on the factors that segment the market. The basic market segmentation that IKEA uses are lifestyles, age, income, family life cycle. IKEA’s furniture is referred as “Start Up” furniture which means furniture for first home. IKEA has placed a strategy of market segmentation in the lifestyles, which means IKEA targets people in China who are interested in “DIY and save money after that” (Johnson, 2013) Merchandise: Merchandise simply means the product range and the prices of the products. The brand IKEA is same however the prices should be low as Chinese customers cannot afford to pay high price, thus the aim for IKEA in China is to deliver high value at low price. According to InterChina’s analysis, China is more likely to lose its cost competitiveness between 2015 and 2020. IKEA should consider long term goals for eg. Global resource optimization. Store layouts: To attract the customers, IKEA has formed their stores with balcony as most of the Chinese houses have balconies also by having such store layouts IKEA promotes its balcony furniture (Lewis, 2005)

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Global Marketing Management Promotion: IKEA’s advertising is dominated by its advertising in catalogue. According to Chinese the translation of IKEA is “Desirable for home living/comfortable home”. IKEA in China has started a t.v show which shows the viewers lessons on home decorating with IKEA. IKEA has promoted different ads in television, news papers, themes etc as well as considering China’s face culture (Burt et. al. 2008) Recommendations Pricing Strategy Currently IKEA is having a low price strategy targeting the middle class people. According to China’s president, Xi Jinping, he declared in November 2014 that “China’s economy will have a stable growth”. My recommendation for IKEA will be to target the double income family who are just young and about to settle their family. This group of people will not be sensitive with price issue. If we talk about Shanghai than out of their total population 12.4% of population are with double income (China.org, 2013). The old generation of Chinese population still prefer low price and are ready to compromise with quality however the young generation prefers not to compromise with quality (Qiu, 2011) Cultural Acceptance IKEA should go more in depth about Chinese culture and can improve their store layouts as well their online web stores. They can collaborate with Taobao (Chinese online shopping) where they can promote IKEA furniture. Also in IKEA canteen they should start offering Chinese taste and their local food so that people will more get attracted and will at least visit store once if they haven’t visited before. Normally in English culture we use forks and knife, similarly Chinese eat their food with Chopsticks, IKEA doesn’t make chopsticks but can at least make some holders which can innovatively hold chopsticks, this will definitely make Chinese people happy and they will see their culture being adopted by IKEA. Conclusion When IKEA first entered in to China, they tried many ways to get success however they didn’t gain much profit. Their strategy wasn’t successful but it was good that they entered in 14

Global Marketing Management to China through Joint Venture as if they would have expanded their business on their own than the whole company should have suffered the negative results. IKEA has many more strategies and they are coping up well and are getting success over their competitors. However they have threats from the local competitors as IKEA furniture is easy to copy and their designs have been really simple. But due to now its popularity IKEA is getting success in the Chinese market but to stay in the competitive Chinese market IKEA has to bring out new strategies every now and then and thus can secure their position in the market. References Brown, G. 2013. Furniture giant IKEA sees rapid growth in China. (Online). Available from: http://english.cntv.cn/program/china24/20131108/101046.shtml (Accessed on 16/12/14)

Burt, S., Johansson, U., and Thelander, A., 2008. Standardised marketing strategies in retailing? IKEA’s marketing strategy in China, Sweden and the UK. 6(7). pp. 1-25

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Global Marketing Management Olenski. S., 2013. How retail brands are using technology to provide added value to consumers. [Blog]. Available at: http://www.forbes.com/sites/steveolenski/2013/11/25/how-retail-brandsare-using-technology-to-provide-added-value-to-consumers/ (Accessed on 4/12/14)

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