Pestel Analysis of Ikea Entering Into Indian Market

VIGNANA JYOTHI INSTITUTE OF MANAGEMENT

TOPIC

PESTEL ANALYSIS OF IKEA ENTERING INTO INDIAN MARKET

SUBMITTED TO Mr. Sanjay Prasad G, Research Asst

Prepared by Surya Deepak Goud

INTRODUCTION ABOUT THE COMPANY IKEA was founded in 1943 by Ingvar Kamprad and has turned into an international furniture retailer, which specialises in stylish but inexpensive Scandinavian designed furniture. It is a privately held retailer chain that sells flat pack furniture, bathroom and kitchen accessories all over the world, which specialises in stylish but inexpensive Scandinavian designed furniture. IKEA is an acronym. Since 1943, Ikea has expanded its operations steadily in many countries with most of the stores of the company concentrated in Europe, USA, Canada, Asia and Australia. The IKEA group also has existence in Israel and Middle East. IKEA originally started by selling picture frames, wallets, pens, watches, table runners, jewellery, and nylon stockings etc. Furniture was first added in the year 1948 and IKEA started manufacturing its own furniture since 1955, providing furniture that could be self-assembled at relatively low cost. Since then, the name has been synonymous with selfassembled furniture. Its success in the retail industry is due to the fact that the company has a vast experience in the retail market, product differentiation, and cost leadership. Their unique concept is that furniture is sold in kits that are assembled by the customers at home. The company remains one of the world’s most successful multinational retailing firms, operating as a global

VISION :- The IKEA vision globally is to create a better everyday life for the many. MISSION:- At IKEA Tempe we are dedicated to giving to the local community well being regarded by our customers and co-workers as a social responsible company"

PESTEL ANALYSIS OF IKEA ENTERING INTO INDIAN MARKET

POLITICAL FACTORS

Political factors are how and to what degree a government intervenes in the economy,it includes •

Constitutional System

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Stability of Government

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Business Freedom

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Trade Freedom

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Tax Policy The decision of Swedish retailer IKEA, the world's largest furniture maker, to

invest Rs 10,500 crore in India will send a positive signal to other investors who have turned hesitant in view of the UPA government's policy drift on foreign direct investment. India is in desperate need for such FDI which will bring modern technology. Ikea's decision to enter India comes on the heels of the Indian government's decision to relax the rules on single brand foreign retailers in the country. Ikea will now have to source at least 30% of its production from the Indian market. Foreign direct investment in supermarkets has hit a political hurdle as it is seen as a threat to owners of local mom and pop stores which account for roughly 90 per cent of India's $450 billion retail sector. The fact that the more progressive agricultural states such as Punjab and Maharashtra are in favour of FDI in retail stems from the fact that modern storage facilities will ensure better prices for farmers who are currently at the mercy of middle men. India offers IKEA a huge new market while the government is battling heavy criticism over its management of Asia's third-largest economy where growth has slipped to its weakest pace in nine years.

India has rebuffed a request by IKEA to relax rules on buying goods locally, raising the prospect of a delay in the world's largest furniture maker entering the Indian retail market.

ECONOMIC FACTORS:

Economic factors include •

Economic Growth

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Exchange Rates

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GDP Growth

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Globalisation

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Interest Rates

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Inflation Rate (cost of capital)

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Labour Costs

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Unemployment Rate GDP

$1.676 trillion (nominal: 11th; 2011) $4.457 trillion (PPP: 3rd; 2011)

GDP growth GDP per capita

6.5% $1,389 (nominal: 140th; 2011) $3,694 (PPP: 129th; 2011) 6.87% (July 2012) 487.6 million (2011 est.) 9.8% (2011 est.) $1,410 yearly (2011) $298.2 billion (2011 est.) $451 billion (2011 est.) $36.5 billion (2011-12)

Inflation (CPI) Labour forces Unemployment Average gross salary Exports Imports FDI stock

IKEA's low prices create appeal amongst its customers in tough financial times. It is vital to keep prices as low as possible when the retail sector is depressed. IKEA's pricing

strategy targets consumers with limited financial resources. Its products will also appeal to those with higher budgets through good quality and design. The company must ensure that it is always recognised as having the lowest prices on the market in the future. The fluctuating commodity and raw material prices in INDIA result in rising purchasing costs for IKEA. This will have an impact on the margins of the organization and might lead to passing over the cost to consumers by increasing prices of most things in the supermarket. Furthermore, rising fuel costs will have implications right throughout the supply chain of IKEA leading to an overall situation of increasing prices, resulting in decreased competitiveness. The credit crunch can impact IKEA negatively as it might decrease the purchasing power of consumers and though they will still buy the essentials they may be more cautious. Furthermore, furniture, unlike fast moving consumer goods, are durable and can last for several years and in such economic uncertainty. Consumers may be reluctant to change what they perceive to be still serviceable sets. They may also spend less on luxury items, something that has a greater profit margin for IKEA. All this may result in lowered sales and thus, reduced margins for the firm .At the same time, IKEA may also face stiffer competition from local small retailers who offer furniture at more affordable prices- something which will appeal to cost conscious consumers. This may cause IKEA to reduce its margins, affecting profitability.

SOCIAL FACTORS: 

Population Growth Rate

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Age Distribution

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Perception of Safety.

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Educational Infrastructure

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Employment Patterns

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Cultural Taboos Population:

1,210,193,422 (2011 est.) (2nd)

Growth rate:

1. 41% (2009 est.) (93rd)

Population

29.8%(2010)

below poverty line

(Note: 32.7% live on less than $1.25 a day

68.7% live on less than $2 a day)[3] Life expectancy:

69.89 years (2009 est.) –male: 67.46 years (2009 est.) –female:

72.61 years (2009 est.)

Infant mortality rate: 30.15 deaths/1,000 live births (2009 est.) Age structure 0-14 years:

31.1% (male 190,075,426/female 172,799,553) (2009

est.) 15-64 years:

63.6% (male 381,446,079/female 359,802,209) (2009

est.) Regional language(s): Assamese • Bengali •Gujarati • Standard Hindi • Kannada • Kashmiri • Malayalam • Manipuri • Marathi • Nepali • Oriya • Punjabi • • Sanskrit • Santali • Sindhi • Tamil • Telugu • Urdu As Ikea forays into the lesser tap markets of India, social factors may also come into play. Asian societies are generally more savers than spenders and in such economic certainty, Asian consumers may be unwilling to spend on new furniture, preferring to save for a rainy day. At the same time, the more affluent consumers who are able to spend may be unwilling to buy products from Ikea which has a reputation of requiring self-assembly.

TECHNOLOGICAL FACTORS Technological factors include technological aspects such as R&D activity, automation, technology incentives and the rate of technological change. They can determine barriers to entry, minimum efficient production level and influence outsourcing decisions. Furthermore, technological shifts can affect costs, quality, and lead to innovation. •

Emerging Technologies

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Impact of Internet, Reduced Communication Costs

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Rate of Technological Change

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R&D Activity (SEZs)

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Technology Incentives

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Technology Transfer RFID (Radio Frequency Identification Device) technology can be used for

significant benefits to the supply chain of IKEA. If adopted, this technology will lead to less inventory for the supermarket firms resulting in lower cost for the company which could translate into cheaper prices. The IKEA used quality technology and systems to promote the shorter queues, proper scheduling, tracking and trading patterns, and staffing. It aims to be more productive and establish employee preferences. The system made the IKEA in a position to ensure the right number of staff in a right place and in a right time to match the unique trading pattern s at each stores of IKEA. The company view in optimizing everything from the supply chain is also optimizing and managing the workforce to create an efficient store environment and keep customers happy

ENVIRONMENTAL FACTORS Environmental factors include ecological and environmental aspects such as weather, climate, and climate change, which may especially affect industries such as tourism, farming, and insurance. Furthermore, growing awareness of the potential impacts of climate change is affecting how companies operate and the products they offer, both creating new markets and diminishing or destroying existing ones. The government takes serious matter on protecting the environment where they impose many regulations and laws in protecting, preventing and controlling industrial pollution and improving urban environment. The government also collaborate with many NGO’s in order to maintain the Mother Nature India is the second most populated country in the world with about 1.2 billion inhabitants.

Ports, Airports and a sufficient railway system are the basis for the

countries decent infrastructure. Additionally, India is the largest democracy in the world and has a very stable political

Although, India ranks 122nd in the world when it comes to the ease of doing business, one can say that the general economic environment is favourable for IKEA. There has been constant GDP growth in the last couple of years and the Indian rupee is relatively stable as well. India’s society has been influenced by a very strong caste system in the past which prevented many people from freely choosing what work or business to enter. This has changed and urban regions tend to be more liberal concerning initial cast affiliation than the rural areas. As far as the technological environment is concerned, India’s population is increasingly connected to the Internet but still behind in the international comparison. The Indian climate is quiet diverse due to the country’s enormous size. As there are colder and warmer regions, the consumption behaviour can differ on a regional level due to the diverse climate. Environmental - With regards to the environmental factors such as the air, noise, and water, inspections are implemented to ensure the company provides corrective actions within the stipulated time. The environmental inspection is part of the legal documentation and environmental authorities as the business operations are on-goings and maintains the competence.

LEGAL FACTORS 

Consumer Law

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Discrimination Law

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Employment Law

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Health and Safety Laws

legal compliance of IKEA is strictly implemented with the relevant and applicable laws and regulations that pertain to the environment, social and working conditions. The company also scheduled the most demanding requirements to be specific in maintaining the list of laws and regulations and with the procedures.

1. Legal Suppliers must comply with national laws and regulations and with international conventions concerning the protection of the environment, working conditions and regarding child labour.

2. Working conditions IKEA expects its suppliers to respect fundamental human rights, and to treat their workforce fairly and with respect. Suppliers must: •

Provide a healthy and safe working environment;

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Pay the legal minimum wage or the local industry standard and compensate for

overtime; •

If housing facilities are provided, ensure reasonable privacy, quietness and personal

hygiene. Suppliers must not: •

Make use of child labour.

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Make use of forced or bonded labour.

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Use illegal overtime.

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Accept any form of mental or physical disciplinary action, including harassment.

3. Environment and forestry At IKEA, we shall always strive to minimize any possible damaging effects to the environment, which may result as a consequence of our activities. Therefore, IKEA and its suppliers shall continuously reduce the environmental impacts of operations. Suppliers must: • Reduce waste and emissions to air, ground and water; •

Contribute to the recycling of materials and used products;

Suppliers must not: •

Use or exceed the use of substances forbidden or restricted in the IKEA list

of '

Chemical Compounds and Substances'; •

Use wood originating from national parks, nature reserves, intact natural forests or any areas with officially declared high conservation values, unless certified

IKEA Porter’s Five Forces Analysis Rivalry among existing firms It is intense in the global market of discount furniture and the major players in the industry include Euromarket Designs Inc, Galiform plc, Wal-Mart Stores Inc, Argos and others. However, currently IKEA is the undisputed market leader in the industry of discounted furniture in the global scale. Threats of New entrants to an industry can raise the level of competition, thereby reducing its attractiveness. The threat of new entrants largely depends on the barriers to entry. High entry barriers exist in some industries . whereas other industries are very easy to enter .Key barriers to entry include - Economies of scale - Capital / investment requirements - Customer switching costs - Access to industry distribution channels - The likelihood of retaliation from existing industry players. Threat of Substitutes The presence of substitute products can lower industry attractiveness and profitability because they limit price levels. The threat of substitute products depends on: - Buyers' willingness to substitute - The relative price and performance of substitutes - The costs of switching to substitutes

Bargaining Power of Suppliers Suppliers are the businesses that supply materials & other products into the industry. The cost of items bought from suppliers (e.g. raw materials, components) can have a significant impact on a company's profitability. If suppliers have high bargaining power over a company, then the company's industry is less attractive. The bargaining power of suppliers will be high when - There are many buyers and few dominant suppliers - There are undifferentiated, highly valued products As an example of IKEA, in recent years, had heard from its customers that many of its furniture offerings were too complicated to be assembled by the customer; showing the power of the supplier to make a difference, IKEA has gotten cooperation from some suppliers to provide materials that are easier for the customer to assemble, thereby adding value to the supplier relationship. Bargaining Power of Buyers Buyers are the people / organisations who create demand in an industry. The bargaining power of buyers is greater when there are few dominant buyers and many sellers in the industry and the products are standardised. Buyers have a great deal of influence over IKEA's product line and direction, for example, in the 1960s, IKEA developed the ability to package its unassembled furniture in flat cartons, making it easier for the buyer to handle the cartons.

CONCLUSION The IKEA group is one of the world’s largest home furnishings companies. The company considered various values in the incorporation of their supply chain as part of their process in learning. The company, known for huge stores selling flat pack furniture and accessories, it would invest 1.5 billion euros to open 25 stores in Asia's third-largest economy after initially balking at India's sourcing requirements. The Indian government is also relaxing some of the local sourcing conditions to make it easier for IKEA and other foreign retailers to enter India.

References: 

http://www.papercamp.com/group/ikea-swot/page-0

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http://www.youtube.com/watch?v=hBewYCLS5jw

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http://www.businessteacher.org.uk/business-resources/swot-analysis-database/ikeaswot-analysis/

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http://www.ikea.com/us/en/customerservices/faq#faqAnswers3http://ibnlive.in.com/news/ikea-to-enter-india-invest-15-bln-euros-in-stores/2676787.htmlhttp://article.wn.com/view/2012/06/24/IKEA_Knocks_on_Indias_Doo

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http://www.oppapers.com/essays/Mkt-421-Environmental-Factors/7933

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http://articles.economictimes.indiatimes.com/2012-08-07/news/33083662_1_ikeaforeign-retailers-swedish-meatballs

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http://www.authorstream.com/Presentation/FenellaAndrade-1178086-ikea/