Case Study Example of the Market Entry Strategy of IKEA for the Indian Market

2021-07-13 11:51:42
5 pages
1336 words
University/College: 
Sewanee University of the South
Type of paper: 
Case study
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#1. Analyze the reasons for IKEAs delayed entry into Indian Market

Apparently, IKEA did not enter the Indian market until 2013, though the firm has operated in the country since the 1980s as a sourcing destination for its international stores. Regardless of opening its regional procurement offices in Gurgaon, India, in 2007 the company still encountered critical barriers that blocked its entry into the Indian market. Indias stringent Foreign Direct Investment (FDI) regulations (Deresky, 2017). For instance, in 2012, IKEA applied for entry after India had made some changes in its FDI policies. However, the company was forced to wait for another year, thus hitting many stumbling blocks before getting approval from the Indian government to establish its stores.

IKEAs anticipation that the opening of the Indian sector would take more time prompted IKEA to abandon its efforts of developing stores in India with an investment of 300 million, thus delaying its entry into the Indian market. Failure to collaborate with a foreign partner also hindered IKEAs expansion in India. Apparently, there was a possibility of IKEA setting up its stores in partnership with Indian firms. However, the idea was opposed by IKEAs CEO, Mikael Ohlsson (Deresky, 2017). According to Ohlsson, the joint venture was not an option for IKEA in India. IKEA has spent years streamlining costs, making investment money go further, and cutting out middlemen. This further delayed the companys efforts to enter the India market.

The complex political framework in India also acted as a hindrance to IKEAs entry into the Indian Market. Cultural differences and approaches to conducting businesses hampered IKEAs efforts to establish itself in India. Corruption is also another issue that made IKEA delay its entry into Indian market. IKEAs implementation of anti-corruption policies and practices which conflicted with Indias political system. IKEAs decision to expand its operation in India was also opposed by some stakeholders in the Indian economy. The critics alleged that the entry of such companies would put millions of small-time shops out of business.

#2. Discus the market entry strategy of IKEA for the Indian market? What are the advantages and disadvantages of adopting the wholly-owned subsidiary route in entering the market?

Generally, IKEA implemented wholly owned subsidiary strategy to facilitate its pursuit of global integration. Working directly with suppliers was one of the IKEAs entry strategy in India. After getting approval to set up its stores in India, IKEA outlined the companys investment plan which was the largest by a foreign retailer in India. IKEA targeted at increasing the availability of high quality and low-price products. The companys entry strategy also involved increasing the sourcing of goods from India (Deresky, 2017). The company also prioritized improving the competitiveness of Indian enterprises through access to global designs, technologies, skill development, and global best practices. The company also focused on the automation as a way of overcoming labor shortage challenges.

The company adopted large box retail formats, which were located on the outskirts of the major cities in India. They were introduced with an objective of gaining popularity with other retailers in India. An increase in the competition between large box furniture retailers that had little or no differentiation and a partial or total wipe-out of the low-cost imported furniture market was also expected (Deresky, 2017). This strategy enabled IKEA to maintain price sensitivity of the customer and low-cost furniture.

Advantages

The new wholly-owned subsidiary (Greenfield venture) enabled IKEA to invest directly in another country or foreign market through setting up of a wholly-owned subsidiary. Some of the advantages associated with this approach are that it allows the company to have maximum control of its operations. The strategy also guarantees highest possible returns for the enterprise.

Disadvantages

The Wholly owned subsidiary is associated with high risks. It also encompasses complex procedures as well as being costly.

#3. Describe the key elements of IKEAs globally successful business model. What are the sources of IKEAs competitive advantage?

The companys expansion in the international markets is one of the major elements of IKEAs global successful business model. The company has entered multiple global markets which have increased its profit margins. The company has also set up many stores. The global expansion of IKEA stores took place at a rapid pace during the 1970s and 1980s. The company has since established 44 stores (Germany) and 37 stores (United States). Delivery of high quality and low-price products to its customers has facilitated the companys success as far as its global business model is concerned. For instance, in China, the company had cut its prices by 60 percent since it entered in 1998. This indicates that IKEAs source of competitive advantage is drawn from the companys designing, sourcing, and packaging strategies.

The companys corporate social responsibility (CSR) has strengthened the companys brand, internationally. IKEA is an ethical company which is depicted in its support of various anti-corruption programs. IKEA also worked in partnership with the United Nations Development Program and UNICEF on grassroots development programs such as female empowerment, health awareness, education, water and sanitation, and industry-based programs that benefited 100 million women and children.

#4. Describe the Bureaucratic and Cultural Challenges faced by IKEA in gaining approval to enter India. How did the company overcome these?

IKEA battled against regulatory and political roadblocks before gaining the approval to enter India. Indias strict Foreign Direct Investment (FDI) rules required hindered the companys efforts to enter and set up its stores in the country. Cultural differences was another challenge that IKEA encountered. Indians also exhibited more of an affinity for unique woodwork and designs than for flat geometric furniture. The living room for Indians is a place for socializing, and every activity is around the food. Selling the companys product to the Indian customers was also a key challenge. Indian customer did not like the concept of do-it-yourself (when buyers had to assemble different pieces of the product themselves) (Deresky, 2017). This attests that getting into the homes of Indian customers was difficult.

Regulatory changes enabled IKEA to overcome some of the bureaucratic challenges. For instance, In September 2012, the Indian government tweaked its sourcing clause. It changed mandatory sourcing from MSMEs to preferably from MSMEs and said that foreign firms expecting a relaxation in the 30 percent procurement norms would have to set up a manufacturing facility in India. IKEA also promised the Indian customers that old furniture collected from the customers in exchange for new ones would not be resold in the market but donated to needy families or third-party small businesses through charitable organizations (Deresky, 2017). IKEA also assured the government that establishment of its stores in the outskirts of the city would not displace small food retailers.

#5. Discus the challenges that IKEA could face down line in establishing its stores in India. What steps should IKEA take to succeed in the Indian furniture Market?

The availability of retail space and associated overheads highlights the challenges that IKEA will endure in India. Setting up the targeted number of stores in India requires the company to find a strategic location, which can be costly. Recruiting activities and vendor negotiations is also another challenging issue for IKEA. Establishing additional stores in India imply requires new workforce as well as identifying appropriate vendors to facilitate the companys operations in India. Customers reception of IKEAs products in India is unpredictable. Such uncertainties is a point of concern for the companys expansion program in the Indian market. IKEAs anti-corruption policy can also conflict with various political and legal systems in the country.

IKEA should take particular steps to overcome the highlighted challenges to guarantee its success in Indian market. The company should adopt proper education and training programs that will improve skills and abilities of the local workforce. IKEA needs to renegotiate with the government regarding mandatory 30% compliance of MSME. The company ought to identify vendors who will prioritize the provision of quality products at relatively lower prices. IKEA should also establish its stores on smaller retailer space situated close to the cities in India to help solve the problem of retail space availability.

 

References

Deresky, H. (2017). International Management: Managing Across Borders and Cultures (9th ed.). Pearson Prentice Hall.

 

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