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case study IKEA

Couching Tiger S
wedish furniture giant
IKEA was founded by en-
trepreneur Ingvar
Kamprad in 1943. He be-
2004, for instance, its China revenue
jumped 40 per cent from the year
before. But there was a problem – its
local stores were not profitable.
and raw materials, and because
their design costs were usually nil.
IKEA built a number of factories
in China and increased local sourc-

Tames the
gan by selling pens, wal- IKEA identified the strategic chal- ing of materials. While globally 30
lets and watches by going door to lenges and made attempts to over- per cent of IKEA’s range comes from
door to his customers. When he come them. One of the main prob- China, about 65 per cent of the vol-

Dragon
started selling his low-priced furni-
ture, his rivals did everything to
stop him. Local suppliers were
banned from providing raw mate-
rial and furniture to IKEA, and the
company was not allowed to show-
case its furniture in industry exhibi-
How IKEA’s strategies
tions. What did IKEA do? It inno-
vated to stay in business. It learnt
differ in Europe and China
how to design its own furniture,
bought raw material from suppliers Europe China
in Poland, and created its own exhi-
Value Proposition
bitions. Today, IKEA is the world’s
largest furniture retail chain and Good quality, stylish furniture at Good quality, Western-styled
prices so low that everybody can aspirational brand for the middle-class
has more than 300 stores globally.
afford it population
In 1998, IKEA started its retail
operations in China. To meet local Valued NETWORK
laws, it formed a joint venture. The Product
venture served as a good platform Stylish, functional products and Slight modifications to products to suit
to test the market, understand local home furnishings the local market and reflect Chinese
needs, and adapt its strategies ac- apartment sizes
cordingly. It understood early on Store Location
that Chinese apartments were small The suburbs, next to highways so The outskirts of cities, next to rail
and customers required functional, that access by car is easy networks as most customers use
modular solutions. The company public transport

l iu j i n / a f p / g e t t y i m a g es
made slight modifications to its Price
furniture to meet local needs. The Low-cost Affordable prices
store layouts reflected the typical Promotion
sizes of apartments and also in- IKEA catalogue is the Advertising on Chinese social media
cluded a balcony. main marketing tool and micro-blogging website Weibo has
IKEA had faced similar problems been popular
previously when it entered the Logistics
United States. The company initially Products are sourced and made in Raw material and products are
Everything under the sun: Local shoppers at an IKEA furniture store in China’s Chengdu city developing nations like China and sourced locally. IKEA also built two
tried to replicate its existing business
Malaysia, and then shipped factories in Shanghai to
model and products in the US. But it
to Europe avoid high import
had to customize its products based
Executive Summary on local needs. American customers,
taxes
for instance, demanded bigger beds
IKEA is known globally for its low prices and innovatively designed furniture. In China, and bigger closets. IKEA had to make
however, it faced peculiar problems. Its low-price strategy created confusion among a number of changes to its market-
aspirational Chinese consumers while local competitors copied its designs. This case study ing strategy in the US. The challenges lems for IKEA was that its prices, ume sales in the country come from
analyses how IKEA adapted its strategies to expand and become profitable in China. It also it faced in China, however, were far considered low in Europe and North local sourcing. These local factories
assesses some lessons the company learnt in China that might be useful in India, where it bigger than the ones in the US. America, were higher than the aver- resolved the problem of high import
As the company opened more age in China. Prices of furniture taxes in China. The company also
plans to open its first store by 2014 and 25 stores in 10 to 15 years. stores from Beijing to Shanghai, the made by local stores were lower as started performing local quality in-
By Valerie Chu, Alka Girdhar and Rajal Sood company’s revenue grew rapidly. In they had access to cheaper labour spections closer to manufacturing to
case study IKEA

save on repair costs. Targeting this segment helped IKEA urban youth. IKEA’s standards. Helping them adopt
Since 2000, IKEA has cut its project itself as an aspirational west- IKEA also adjusted its store loca- new technologies meant higher cost,
prices by more than 60 per cent. For ern brand. This was a massive tion strategy. In Europe and the US, which would hurt business. IKEA
instance, the price of its “Lack” table change in strategy, as IKEA was tar- where most customers use personal decided to stick with low prices to
has dropped to 39 yuan (less than geting the mass market in other vehicles, IKEA stores are usually lo- remain in business.
five euros at current exchange rates) parts of the world. cated in the suburbs. In China, how- As IKEA prepares to enter India,
from 120 yuan when IKEA first came IKEA also had to tweak its mar- ever, most customers use public its China experiences will come in
to the Chinese market. The company keting strategy. In most markets, the transportation. So the company set handy. It understood that in emerg-
plans to reduce prices further, helped The main problem company uses its product catalogue up its outlets on the outskirts of cities Chinese competitors ing markets, global brands may not
by mass production and trimming for IKEA was that its as a major marketing tool. In China, which are connected by rail and copied IKEA’s designs replicate their success using a low-
supply chain costs. however, the catalogue provided metro networks. price strategy. There always will be
High prices were one of the big-
prices, considered low opportunities for competitors to The China expansion came at a
from its catalogue local manufacturers who will have
gest barriers in China for people to in Europe and the US, imitate the company’s products. cost. Since 1999, IKEA has been and then offered a lower cost structure.
purchase IKEA products. IKEA’s glo- were higher than the Indeed, local competitors copied working on becoming more eco- similar products at It is more important what cus-
bal branding that promises low IKEA’s designs and then offered sim- friendly. It has been charging for tomers think about the company
prices did not work in China also
average in China ilar products at lower prices. IKEA plastic bags, asking suppliers for
lower prices rather than the other way around.
because western products are seen decided not to react, as it realised green products, and increasing the IKEA wanted to be known as a low-
as aspirational in Asian markets. In started targeting the young middle- Chinese laws were not strong use of renewable energy in its stores. bags and they did not want to bring price provider of durable furniture,
this regard, IKEA’s low-price strategy class population. This category of enough to deter such activities. All this proved difficult to implement their own shopping bags. Also, a while Chinese consumers looked at
seemed to create confusion among customers has relatively higher in- Instead, the company is using in China. Price-sensitive Chinese majority of suppliers in China did not IKEA as an aspirational brand. It is
Chinese consumers. comes, is better educated and is Chinese social media and micro- consumers seem to be annoyed have the necessary technologies to likely that Indian consumers will
The company realised this and more aware of western styles. blogging website Weibo to target the when asked to pay extra for plastic provide green products that met also look at IKEA in a similar way.

ikea’s India rollout will be slow the main challenge is to adapt


“FDI in retail in “It’s essential
India has been T he success of IKEA in China is an
interesting adaptation example
highway, with great links to a major
metropolis) that is crucial to the T here is no formula for success
that fits all marketing strategies
is an unexpected twist in its brand
proposition. IKEA demonstrated
for successful
a non-starter, by a global retailer. Yet, it may not
be much of a predictor of IKEA’s
success of its business model. This
will mean the first store will take
when a global brand decides to try a courage to get the most relevant marketing
hopelessly mired fortunes in India. This may have less much longer to open than Indians
new market, except perhaps
unconditional acceptance and
changes. By courage I mean all big
corporations are ready to shift campaigns
in special-interest to do with IKEA and more to do with
the economic policies of India.
expect and the rollout will be
painfully slow. Fortunately, as a
responsiveness to changes. The production, work with local sources, to take into
greatest challenge is to adapt overcome legal requirements but not
politics” A well-designed foreign direct privately held company with a long- constantly. It’s essential for too many of them are ready to adapt consideration the
Prof Nirmalya Kumar, investment (FDI) policy should have
resulted in a rush of much-needed
term orientation, IKEA will persevere
where more impatient publicly held
successful marketing campaigns to
take into consideration the local
a brand proposition that suits the
level of development the market and
local approach”
Professor of Marketing and Director
of the Aditya Birla India Centre at foreign investment to India, firms may have given up. approach versus the global/regional consumer perception require. Yelena Zubareva,
London Business School upgrading of the supply chain, For India to kick its economy Regional Marketing Manager,
desire for standardisation. A one- IKEA is a strong brand that
modernisation of the retail sector, as back to the growth rates necessary FWS/OEM SHELL
size-fits-all approach is a rare reality. understands that growing globally
well as more choices for consumers for meeting the aspirations of its A consistent global brand promise is requires sacrifices and innovation
with lower prices. Instead, FDI in citizens, we need to roll out the red a desirable asset but what makes a from global teams, and they are
retail, like in higher education, has carpet for foreign investors instead real difference is to be brave and ready to listen, respect and learn
been a non-starter, hopelessly mired of red tape. Competition law and ready to change the target audience from the local environment. The
in special-interest politics. The rules trade policies are supposed to and build a differentiating promise. European headquarters’ excitement
are so onerous that a mass retailer ensure that a free competitive IKEA made all necessary to enter new markets with proven
such as IKEA will find it hard to meet marketplace exists, with easy entry adjustments to make sure there was best practices is something of the
them without penalising customers and exit, not protect existing no mismatch in its growth ambitions past, proving that the real shift in the
with higher prices and lower choice. competitors from new entrants. and brand promise. Becoming an global mindset is to recognise that
Also, it will be difficult for IKEA to Capitalism without failure is like aspirational brand which is blogging local versus global can bring
find the type of location (size, off a religion without sin. with the Chinese middle-class youth optimum results.

104 Business today July 21 2013 July 21 2013 Business today 11


case study IKEA

The company also learnt that who are keen on decorating their
emerging economies are not ready homes with stylish international
for environment-friendly practices, brands. The company has learnt
especially if they result in higher that doing business in emerging
prices. IKEA, famous for its flat-pack markets is a different ball game for
furniture which consumers have to a multinational company. IKEA did
assemble themselves, realised that well to adapt in China, although it
understanding the local culture is In India, IKEA may took numerous changes to its strat-
important – Chinese people hate the
do-it-yourself concept and Indians
face some egies and more than 12 years for the
company to become profitable in the
likely do so even more. country-specific Asian nation. ~
IKEA may face some India- challenges such as (This case study is from the Aditya
specific challenges such as varying
laws in different states ruled by dif-
varying laws in Birla India Centre of London Business
School.)
ferent political parties. This could different states What can we learn from IKEA’s
make its operations, especially dis- brand adaptation in China? Post your
tribution and logistics, a bit chal- comments at www.businesstoday.in/
lenging. IKEA already has had to Indian customer preferences casestudy-ikea. The best response will
wait a long time to get permission to and economic environment are win a copy of India Inside by
open stores in India. The delay in similar to the Chinese market. IKEA Nirmalya Kumar and Phanish
policy-making at the state level will likely have hopes of attracting Puranam. Previous case studies are at
could be even longer. India’s urban middle-class buyers www.businesstoday.in/casestudy

Best of the lot BT receives scores of responses to its case studies. Below is
the best one on 7-Eleven in the issue dated May 26, 2013

Arjun Sood [arjunsood12345@gmail.com]; Post Graduate in Rural


Management (2011-13), Institute of Rural Management Anand
The 7-Eleven case is an apt example of multinational corporations
adopting different strategies to enter and sustain in new markets. The
corporations are shedding their standardised notions and are becom-
ing flexible for local markets. It is interesting to see how 7-Eleven
followed its overall vision (the concept of convenience stores) but
positioned itself differently in Indonesia. That is the power of a brand.
International players across various sectors such as automobiles, fast
food, furniture, banking and finance, clothing and retail are vying for
Asian markets. Entry into these markets may be easy but sustaining
requires in-depth understanding and then adapting to the culture, fashion and spending habits, and
demography of the patron country. McDonald’s followed this adaptive strategy in India when it launched
McAloo tikki burger to attract customers. Since then McDonald’s has been working to add variety to
the India-specific menu (Masala grill being the latest addition).
It would have been enriching had the case study covered the following aspects: Does the company
follow this adaptive strategy in other countries also or does it stick to its original strategy? What are
the possible negatives of such a strategy? Does such a strategy hamper the efforts of an organisation
to create a uniform brand identity?

Arjun Sood wins a copy of India Inside by Nirmalya Kumar and Phanish Puranam

104 Business today July 21 2013