Globalization is a driving factor with a set of global trends that define international business in a foreign territory. This always keeps into thought efficient strategy for decision making at management level for attaining highest results. When global economy creates the business horizon then business is influenced by several features and these are trends of FDI which attracts foreign business in another land or territory other than the home country of the foundation of the business (Hill et al. 2014). Moreover, FDI trends have been mentioned in this discussion along with the cause of business motivation that has driven IKEA to select this country for business operation. Through this work of essay, the stands of IKEA pertaining to strategic management for business operation in the country has been discussed and analyzed.
Strategies and international management hold adequate knowledge that can help a firm which thinks of better strategic implementation (Freeman 2010). Without strategies, firms cannot succeed and for a firm e.g. IKEA, international management related knowledge can be helpful to ensure better internationalization for successful business operation in India. The strategy is often termed as a part of overall planning which supports in accomplishing short term and long term business goals (Freeman 2010). International management denotes management operation for business when more than one country is considered for the business operation. As per the opinion of Hitt, Ireland and Hoskisson (2012) international management involves business functions beyond the border of own country and implementation of efficiency and skills to manage a business in the foreign territories.
IKEA is a multinational firm based in Sweden known for its assembled furniture and ready to sales proposition in several markets across the world. The company was founded in Sweden in the year 1943.
Vision – the vision of the firm is to make everyday life better for many people.
Mission – to offer affordability in terms of a large range of better designed home furniture at low prices for all segment of customers.
IKEA’S strategy for market entry in India ensued with understanding markets in India, planning for products arrangement for ensuring acceptance among people across regional and domestic spectrums (Robson 2015). IKEA opened its first store in India’s Hyderabad city with an investment worth Rs 1000 Crore. It has 950 directs and 1500 indirect workers for its store related work. Near about 7500 products are offered by IKEA in its store in Hyderabad. Twenty percent of products of the firm in India are locally sourced.
The business model of IKEA as shown above persists in its arrangement of keeping suppliers and customers close to business as well as coordination among volumes and prices. In process offers of the firm are directed towards customers and production. Offers towards needs among customers include several variants e.g. real life conditions, real need in life at home, real choices, real space and real wallet. On measures of production, offers are arranged based on materials, suppliers, industries, technicalities, combinations and volume of offers and lastly, unknown and known proposition (Freeman 2010).
Lowest prices for customers are a prerequisite which has low cost requirement for accomplishment. In due course, sales go up in volumes and profits become achievable. Therefore, business of IKEA is always keen to apply the model to maximize the potency of low cost-low price strength to achieve big volume of sales with higher return with adequate attention on actual needs’ fulfilment of customers. With increase in volume of business and profits, suppliers of IKEA also remain benefitted.
The move of internationalization is backed by some motives. In India reasons of FDI are motivated by several factors e.g. diversified resources, better conditions in markets, availability of skilled manpower (Hill et al. 2014). The move of internationalization by IKEA in India is driven by some perceived benefits which are huge markets, abundant resources, and efficient labors. The nature of FDI by IKEA in India is Greenfield investments which helped the firm to start a new venture to support new operational facilities by involving newly recruited people (Robson 2015).
India’s emerging rate of disposable earnings and consumer class and a mere 15% organized furniture segment seemed to be a lucrative market to the global brand. However apart from the possible political hindrances present in the sub-continent, India’s FDI policy posed as the crucial barrier to IKEA’S entry. The brand could get approval of 100% FDI only with a clause of local sourcing of goods to an extent of 30% in 2012 which posed as a serious issue and IKEA sought the time frame of the market entry compliance from 5 year to a 10 year window (FIPB clears IKEA’s FDI proposal, 2018). The brand was also disallowed initially to operate in-store beverage and food outlets, which could have lead to the alteration of the brand’s business model affecting its end-user experience. The brand finally convinced the successive governments thereafter till date about its presence in the fringes of the city citing the necessity of the in-store food outlets with an assurance of inclusion of the local retailers and vendors. The brand had to struggle from 2012-2018 with the norms of FDI and eventually with the recent relaxation of the norms that suggested incremental local sourcing of a single brand for the first five years for international operations in opposition to compulsory 30% local sourcing followed by meeting the yearly norms of sourcing thereafter, IKEA set sail in India quite significantly (FIPB clears IKEA’s FDI proposal, 2018). The brand has also agreed to strategise its operations in compliance with the amended regulations of retailing in a single brand with a conditional clause of maintaining twin entities in the form of a local retailing unit having foreign investment and a sourcing unit in the subcontinent.
IKEA adopted some strategies to achieve competitive advantages and these are operational effectiveness approach, positioning approach and resource-based approach. The firm has focused on the main ground for building competitive advantages and that was an evaluation of present situation related to competitors in markets, operative efficiency and rarity of resources within the firm (Schot and Geels 2008). In perspective of the firm related to business in India, lean production and business excellence are the approaches used by IKEA. These proved better for the firm since waste minimization and operational improvement was achieved faster than competitors (Finkelstein, Hambrick & Cannella 2009).
Positioning approach of IKEA included an ‘outside-in’ approach similar to that of Porter’s generic strategies for achieving market leadership and competitive advantages. Low cost and differentiation strategies were emphasized by IKEA to have a strong foothold in India. Moutinho (2011) argued that the approach of IKEA in relation to business in India is somewhat called ‘Hybrid’ and not stuck in the middle. The firm used innovation for ensuring mass customization and this is too in low prices than competitors.
IKEA’s strategy formation is based on the implementation of resources that are actually competent for business (Doz 2017). IKEA played as large productivity firm and decided to pay higher fixed costs of engaging in FDI. The firm aimed to imitate its domestic production in the foreign market of India. This has been termed as “proximity-concentration trade-off’’ and this helped the firm to minimize costs and improve proximity.
IKEA expects to earn π * from India but this is focused on t* denoting transportation costs and tariffs. IKEA by setting up a plant in India is thoughtful to avoid the high trend of trading costs.
Therefore high profit like the situation of π*(0)
The requirement of additional fixed cost (f)
Profit by jumping over trade cost, the variance among FDI and if Exporting is considered, then
ΠX=
IKEA is enabled by internalization for increasing involvement of business globally. Thus the firm has its focus on internalization for ensuring a balance among transactional costs involving the market of India and organizational costs of running a business (Eden and Ackermann 2013).
FDI in India seemed attractive due to consideration of some country-specific assets (Thompson and Martin 2010). IKEA is believed to have achieved π*(0) like position in Indian markets strengthened by contribution out of three factors of OLI (ownership, location, and Internalisation). Among the OLI factors, the most stunning performing factor for IKEA is a location that is driven by a decision such as horizontal as well as greenfield investments in India for doing business to the firm’s maximum advantages. IKEA’s anticipation of ensuring standardization in Indian market by tapping into organized space of retail furniture without changing core and basic business pattern like selling of assembled furniture to serve ready to sale requirements in the country was not irrational (Hitt and Duane Ireland 2017).
Some apparent benefits from the OLI factors to IKEA are business excellence viewed in the measure of the popularity of products and their acceptance in the country and successful business operation in India’s organized retail market. Additionally, the firm has put emphasize on after sales service that is supported by the ability to offset the additional operating cost or trading expenses in the foreign location e.g., India (Hair 2012).
The firm has gained experiences from its local market before focusing on India. The strategy involved reduction in transaction costs, operational costs with a focus on the use of advantages e.g. low cost of labor and raw materials and government’s incentive plan.
In Indian markets, the firm desired to implement economies of scale and effective functions of organizational operations. IKEA’s perspective had a focus on keeping prices low for attracting customers who look for low priced products and at the same time status, conscious people hold high perception for high priced products. Therefore, the balancing act regarding pricing was difficult for IKEA. Local furniture makers have many loyal customers and IKEA has trouble to understand the needs among people in the country. Assembly, as well as distribution, are challenges in the furniture market in India. Addition of customer service specifically after sales becomes doubly difficult (Hill 2017). Furniture diversification and retention of its basic business proposition that is ‘DIY’ were helpful for IKEA to highlights its business mission and product functionalities. The firmed focused on a sale proposition which supported selling of multiple items at a cost less than its competitors (Bascle 2008). Volume of production, customers’ interests regarding products and better response fetched the required level of ability for the firm to scale up production volume and proportionate sales. This subsequently eased off quality retention planning and its implementation.
Political – India is run by federal nature of government. Privatization is an initiative by the government together tax simplification such as income tax and goods and service tax (GST) for benefitting common people and business houses. FDI is encouraged by government and this is beneficial for IKEA to consider as a suitable market entry mode in the country (Hill 2017).
Economic – economic condition in India is fairly stable. Industrial reform policy gave several advantages. The economic environment is assisted by some factors like liberalization regarding inflow of foreign capital, reduction of industrial licensing, encouragement of FDI. Moreover, the country has a good trend of GDP. Economic surge makes market attractive for investors and IKEA find this attractive. Certainty about demands in market hobbles sometimes due to fluctuating rate of inflation with its effect on purchase capacity among customers (Doz 2017).
Social – India has a huge population which provides adequate opportunity for products’ acceptance. Market opportunities are propelled by demand-driven–cost-effective items among young and aged population in the country with differences in the requirement of product’s variants and styles. Income pattern is uneven among people and this keeps firm like IKEA considerate on making better pricing strategy (Moutinho 2011).
Technology – technology has changed products features and cost involvement pattern in business. Upgraded brick and Mortar stores along with online and offline stores’ presence are examples of technological application. RFID technology is an addition to features for locating and checking the movement of products on shelves in retail stores. Therefore for a firm such as IKEA, technology is a lucrative factor for doing business in India (Robson 2015).
Legal – business firms in India are subject to several changes in legislation and these are increasing in minimum wages, discrimination-free workplaces. Statutory compliance is obligatory for local and foreign firms.
Environmental – regulations for the waste control and pollution minimization are strict in the country. Focus on recycling of products, a restrained form of industrialization and urbanization for keeping the environment safe are important moves of government to do justice to natural resources and environment.
Threat of substitutes – market in India is full of small-unorganized and large-organized retailers of furniture. IKEA during its initial business periods had to struggle to find a balance in demands among consumers hailing from these two market segments. Domestic retailers are more competitive to the firm. Customers are price sensitive and are much interested to shift their purchase decisions among other alternatives offered by both organized and unorganized markets and retailers (Hill et al. 2014).
Intensity of rivalry – markets in India are driven by competition with presence of many foreign firms. Online retailers claim substantial share of markets. Trade liberalization since 2006 has increased presence of foreign firms in India and this has compounded market competition for IKEA.
Bargaining power of suppliers – the market in India is featured with good density of suppliers. They all operate on small scale. Retail sector in India is of fragmented pattern and Indian suppliers feel less capable of ensuring economies of scale. This diminishes their power to some extent. IKEA therefore had its eyes on market capitalization.
Threats of new entrants – IKEA tried to analyse this position in its own measure. In India, an established foreign firm and local or domestic firm achieve some cost advantages which are deemed to be non-achievable by new firms. Apart from capital expenditures, they are averse to modernization as well as extravagant marketing efforts to capture markets. IKEA had to struggle to access to distribution channels in the country and this is well relatable to other firms aspiring to have their presence in the country.
Bargaining power of customers – Online retail businesses by established big firms such As Amazon and Flipkart are constant threat to new ready to assembled furniture of IKEA. Indian customers are always open to many alternatives and cost effective furniture. This has strengthened their position in markets.
IKEA’s position in India market is focused on localisation along with previous price cutting strategy (FIPB clears IKEA’s FDI proposal, 2018). IKEA is in a position of creating multichannel experience for customers in India. In line with this, the firm is set to introduce e-commerce operations in Mumbai in India. The second store of the firm in Mumbai is slated for commencement. IKEA successfully opened its first store in Hyderabad in India. At present the firm successfully sources twenty percent products locally. Localisation effort of IKEA is partly achieved but industry experts are optimistic about more success for the firm. IKEA achieved FDI approval in 2013 and this allowed 100 percent FDI. IKEA successfully collaborated with UrbanClap. Customers after selecting furniture from stores look for services for furniture assembly by service booking through the app of UrbanClap.
Market entry moves of IKEA in India are dominated by several important strategies along with internalization and FDI. The firm has an array of furniture that is ready to use with the assembly of parts. After sales service is a vital planning for the firm to strengthen its position in markets of India. Several theoretical explanations are included in this essay work. The firm focused on competitive advantage by process of operational efficiency approach, positioning approach and resource-based approach.
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