SEMESTER: AUTUMN

Written Assignment

2013

Assignment:

IBAT – MBA

Programme : Master of Business Administration

Module : International Business Context

Lecturer : Joe Fitzgerald

Submitted by,

Mohammed Azeem Azeez, Student Id : 2143702

Syed Akram, Student Id : 2137553

Submission Date: 14th November 2013

IKEA is that the Worlds Largest furnishings merchant selling Essay

Introduction

According to KeyNote, 2008, IKEA is that the world’s largest furnishings merchant.

IKEA sells a life-style to its middle-class international shoppers through low-cost up

to date flat-packed styles. The Swedish primarily based company has 237 stores

round the world and it\'s the planet leader in home furnishings (Mintel, 2006). IKEA is

to blame for a worldwide strategy that concentrates on value management, potency

and quality.

In a series of studies during which shoppers assembled IKEA boxes, collapsed art,

and engineered sets of Legos, we have a tendency to demonstrate and investigate

the boundary conditions for what we have a tendency to term the "IKEA effect"-the

increase in valuation of successful product. Participants saw their unprofessional

creations-of each utilitarian and indulgent products-as similar in price to the creations

of specialists and expected others to share their opinions. Our account suggests that

labor results in accrued valuation ends up in palmy completion of tasks; so when

participants engineered then destroyed their creations, or did not complete them, the

IKEA impact dissipated. Finally, we have a tendency to show that labor will increase

valuation of completed product not only for shoppers World Health Organization

profess associate interest in "do-it-yourself" comes, however even for those that

square measure comparatively uninterested. we have a tendency to discuss the

implications of the IKEA impact for promoting managers and organizations a lot of

usually.

However, there's far more to IKEA than simply its low-cost trendy furnishings. As

Eberhard-Harribey (2006) states, despite its overtly aggressive target cutting prices,

IKEA may be a leading company once it involves company Social Responsibility

(CSR) matters (see additional on Appendix 1). IKEA has managed to mix a value

focus strategy with CSR problems as critical firms like Starbucks and also the Body

search, that is taken into account to be high CSR-oriented however that charge a

premium-price for its property merchandise. IKEA has respectable policies on kid

labour and has sturdy partnerships with United Nations Children's Fund, and also the

WWF.

Moreover, IKEA features a multinational strategy. The business maximise its

international strategy of product standardisation while responding to, client native

wants. globalization, factors like economic process, release, additional income and

rising housing market have created several opportunities for growth during which

IKEA have unendingly taken advantage of in several countries. In spite of its

international presence, it\'s worthy to illustrate 2 facts. 1st truth is that Europe

accounts for eighty two of IKEA’s total revenues and North America accounts for V-J

Day (Datamonitor, 2009). Second truth is that in each Europe and North America

regions, as a results of the economic worsening the furnishings retail business is

underneath lots of competition.

In order to scale back the political-economical and social-demographical risks

inherent with such regions, IKEA has to target diversifying its operations into different

markets promptly and expeditiously. Moreover, by increasing into different markets,

IKEA may take benefits of opportunities that these new markets supply that current

markets now not do. for instance, within the past once China opened-up its policy to

FDI, it eventually LED to the Chinese economic improvement, the increase within the

housing market and after the demand for home furnishings in China. These events

have clear allowed IKEA to with success enter this market. the present strategy

mode that IKEA undertakes once coming into a replacement market is International

Franchising whereby merchandise, restricted rights, operative systems and also the

use of IKEA’s brand area unit sold-out to the foreign franchisee for a total fee and

share within the profits.

In this work IKEA’s arrange are going to be to any its international growth into the

South yank Market, having Brazil as a target. Brazil is that the largest country in

South America and in keeping with Datamonitor (2009), it\'s characterises the

foremost engaging country for the Furnishing business.

The following associate degreealyses have as an aim to critically confirm whether or

not or not IKEA will with success enter the Brazilian Market and the way it ought to

best endeavour such a move.

Industry Overview: international Home Furnishing Retail

The home furnishings retail sector includes furnishings, floor coverings and unit

textiles. furnishings sales dominate the world home furnishing retail sector, with

63.9% of the sector's worth. IKEA has the biggest share within the international

home furnishing market. Its share accounts for two.3% (MarketLine, 2009).

Europe accounts for forty three.1% of the retail sector\'s worth and also the

compound annual rate of the world within the amount two004-2008 was 2.6%.

Moreover, in keeping with Datamonitor, 2009, sector’s worth reached a worth of

$663.4 billion in 2008 and it\'s forecasted to grow by twenty four.9% in 2013

(MarketLine, 2009).

Moreover, in keeping with Mintel (2008) the united kingdom is IKEA’s most no-hit

market. but is being control back by the problem of obtaining new stores, low client

confidence owing to the economic retardation.

The UK housing market has slowed dramatically and with house costs and also the

variety of transactions forecast to fall this year, this should be dangerous news for

furnishings retailers. Already in 2008 there are variety of casualties, together with

Sleep Depot and New Heights.

At identical time furnishings retailers face unexampled levels of competition from

outside of the specialist market from the likes of Tesco, Aldi, Woolworths, Argos,

Homebase, B&Q, and even Next and M&S.

Five Forces Analysis

Retailers of furnishings, floor coverings and unit textiles area unit the players of the

house furnishing retail sector and also the main patrons area unit taken as end-

users, and makers of furnishings, floor coverings and unit textiles because the key

suppliers.

IKEA’s company Social Responsibility

According to Maon, Sweden and Lindgreen (2007) IKEA receives pressure from

numerous external stakeholders. This pressure in the main exists as a result of

IKEA's business is sculptures que on value leadership the bulk of its raw materials

area unit originated from developing countries. Since the tip of the Eighties, IKEA’s

policies are underneath constant scrutiny, notably from NGOs. for instance, IKEA

was underneath the general public eye over kid labour in Asia, operating conditions

in Europe and Asia, and wood from questionable forests in country and Russia.

Some critics argue that IKEA’s property practices took too long to be enforced et al.

question why the corporate don't place social and environmental labels on its

merchandise, even supposing the merchandise meet criteria for merchandise made

from tropical wood materials.

Identification of a replacement Market in Brazil

Whereas the North yank furnishings and floor coverings market is presently browsing

tough times, South yank has unbroken sturdy growth in worth, a trend that in keeping

with Marketline, 2009 is supposed to hold on rising.

As for 2010 IKEA can enter the South yank market. the primary IKEA store are going

to be allotted in Santo Domingo, state (Reference?). However, because it is shown

bellow there area unit different countries at intervals South America during which

IKEA might be no-hit.

Industry Profile, Furniture & Floor Coverings in Brazil

The South yank furnishings & floor coverings market generated total revenues of

$19,801.3 million in 2008, representing a compound annual rate (Datamonitor, 2009)

of 7.5% for the amount 2004-2008.

Market Segmentation

“Living area sales has verified the foremost moneymaking for the South yank

furniture & floor coverings market in 2008, generating total revenues of $7,420.1

million, admire thirty seven.5% of the market's overall worth. Brazil” (Marketline,

2009) but, Brazil leads the South yank furnishings and floor coverings market,

accounting for sixty three.3% of the market's worth.

Factors Influencing the chance of latest Entrants and New Entrants within the

furnishings Market in South America. As shown higher than, there's a scarcity of

brand name strength within the resident furnishing market. this is often flip shows

that somewhat straightforward for brand spanking new businesses to enter the

market. samples of such business but, area unit those well established

heterogenous retailers, like supermarkets and department shops coming into the

market.

However, the impact of the present international economic recession on the retail

surroundings will discourage the doorway of latest furnishings businesses into the

high-street within the medium term. there\'s but very little government regulation that

solely concentrates on health and safety of the merchandise. Overall, Datamonitor

(2009) sees that the threat of latest entrants to the furnishings market in South

America is taken into account to be sturdy. it's so necessary that establishes its

presence within the region before different transnational firms commit to enter the

South yank. By being a coming into such region, IKEA will be as no-hit as Telefonica

has been since 1990 (Griffin and Pustay, 2009). It will generate additional sources of

revenue furthermore as establishing new client base before competitors.

These firms have to be compelled to contend intensely with the supermarkets, that is

changing into progressively tough in terms of value while not compromising product

quality; because the supermarkets will afford to create smaller margins over a large

vary of merchandise. the present economic worsening is adversely moving retail

sales, reducing growth potential and increasing exit barriers, which reinforces

contention.

IKEA’ s responsibility in Brazil

The Brazilian economy wasn't plagued by the world monetary crisis because the

country’s economy is tightly regulated with orthodox economics policies. The

country’s rate accrued in 2008 to achieve five.9%. Moreover, Brazil is that the

founder member of Mercosul regional integration that as an example, area unit to

blame for seventy fifth of South America’s GDP and it\'s the world\'s fourth-biggest

integrated market. The economic reforms, liberalized foreign investment to most

sectors are thought of to be to blame for the present economic.

The market of furnishings in Brazil has 3 main segments: home (60%), workplace

(25%) and institutional organisations (15%). Analyses show that (reference) this last

section is on the expansion and imports ought to increase. This variation in demand

for foreign styles will actually profit IKEA in Brazil.

The market is additionally restrained by high interest rates (18.3% per annum in

2001) that forestall individuals from tightened bank loans, and so maintain their

getting power at lower levels than if they might borrow cash easier. It then features a

dangerous impact on house getting and asynchronous, lowers the shopping for of

house furnishings too.

However, despite its position, Brazil still suffers from corruption. in keeping with

Transparency International\'s Corruption Perceptions Index for 2008, “Brazil is

graded within the eightieth place out of 179 countries”. as a result of corruption is

appeared to be terribly sturdy in Brazil, the bulk of companies area unit expected to

encounter corruption once proposing contracts to governments. Moreover,

deforestation caused by multi-nationals is creating serious harms to the Brazilian

rainforests. because the demand for environmentally friendly firms in Brazil and

round the world continues to rise, firms like IKEA will actually expect to possess its

CSR scrutinised before receiving any license for operation.

Critical Analysis of IKEA in Brazil

Brazil has pop out to be of the simplest market to speculate (Griffin and Pustay,

2009) the economic reforms enforced when 2003 LED to will increase in real per

capita financial gain, associate degreed an improved financial gain distribution. Real

per capita financial gain accrued Bastille Day from 2004 to 2007 and also the

difference within the distribution of financial gain, measured by the Gini constant

(which ranges from zero, that reflects equality, to 1, that indicates inequality),

diminished from zero.6 in 2000 to zero.5 in 2007.

Although the political stability in Brazil doesn't have identical normal of security as

different OECD’s, the political stability in Brazil is rising steady. Brazil’s president is

taken into account to be additional smart than different South yank leftist leaders.

And though Lula clearly seeks to safeguard national firms, he's additionally aware

that a lot of Brazilian businesses don't seem to be terribly economical. when being

re-elected, Lula has welcome FDI in Brazil with open arms (Reference)

Additionally, because the economic condition scenario in Brazil continues to be high,

the Brazilian government and its population area unit successively terribly active

once it involves social programs. There area unit major government programs that

aim to tackle the issues of financial gain difference and access to credit.

Programmes like “Zero Hunger” (Projeto Fome Zero) provides low-income families

conditional money transfer bases reach nearly one quarter of Brazil’s population

(MDS).

Such programs will be seen as a chance for IKEA. Since IKEA has such renounced

CSR programs in situ, it will actually work with partnership with the Brazilian

government. Also, as additional individuals area unit feat homes, the demand for

furnishings can eventually increase.

With rising markets capturing investors’ attention, several area unit turning their

focus towards South yank markets. sturdy exports, high artefact costs and accrued

investments are contributive factors to growth at intervals several of the resident

markets (Fleming, 2007).

Amongst its neighbours, Brazil is that the country that gives its population the best

average getting power (IMF, 2006) Thus, Brazil appear a awfully engaging

marketplace for IKEA, particularly since the its furnishings imports have veteran a

growth of sixteen.27% throughout the third quarter of 2006. The imports of

furnishings in Brazil area unit controlled by the U.S with thirty ninth of the share,

followed by Deutschland with 12 months and European nation with 100 percent

(ABIMOVEL, 2008).

Because Brazil’s financial gain gap between the wealthy individuals and also the

poor individuals is incredibly high, “The 100 percent richest individuals earn five

hundredth of the wholly financial gain and also the 100 percent poorest individuals

solely get but a hundred and twenty fifth (source?) status area unit terribly

meaningful , exceptional for the middle-classes. As IKEA has been terribly practiced

in commerce lifestyles to its customers (KeyNote, 2008) the standing importance

amongst Brazilians may prove to be advantageous for IKEA. all the same, credit

choice is very restricted among most shoppers United Nations agency area unit

expected to buy their merchandise in instalments. Very ofte, shoppers elect a

particular product not as a result of if its quality, however owing to the payment

facilities. shoppers will pay for a TV of the equivalent of £300 in ten instalments and

with none intercalary interest. IKEA ought to actually bear in mind of consumer’s

shopping for behaviour so as of to possess issues with its liquidity ratios.

As the telecommunication penetration rate in Brazil remains low, IKEA wouldn't be

ready to believe in on-line sales in Brazil within the middle future and its on-line

advertising ought to be terribly economical

Laws requiring pre-sale revealing by a franchisor area unit in Brazil

Brazil shelters dense forests in northern regions together with Amazon Basin which

will be use for picket furniture: half the country is roofed by forests. However, over

the past few years, the govt. has been terribly cautious regarding warming caused by

MNC’s deforestation. thus IKEA would wish to make sure the Brazilian government

that its practices area unit terribly sustainable to be ready to use Brazil’s

endowments.

IKEA in Brazil

From the analysed higher than, it will be subtracted that there area unit many

engaging aspects for IKEA to speculate within the space of furnishings business

within the Brazilian market. 1st of all, the market in Brazil is engaging owing to an

enormous worth of foreign furniture in addition, the labour value is cheaper

compared to Europe and America.

Mode of Entry

All IKEA’s stores in foreign countries area unit managed underneath international

franchising (IKEA, 2009). “Franchising may be a special kind of licensing wherever

the licensor authorises the retailer to utilize its operative systems, logos, complete

names and emblems reciprocally for a loyalty payment (Griffin and Pustay, 2009).

The franchisee wants additionally to produce capital, personnel, personal

involvement and native market knowledge” (Jeannet & Hennessy, 2004, pp.296).

As IKEA has most expertise in fitting franchise contracts, it looks smart to use

identical once coming back to Brazil for the subsequent reasons:

However, International Franchising has its drawbacks as well:

Although the drawbacks of fitting Franchising in Brazil don't seem to be too high and

IKEA may still be terribly no-hit in such a market. supported the data gathered during

this work, a comparatively additional complicated however even additional no-hit

mode of entry will be counseled.

Due to Brazil’s endowment factors and government economic stimulation package to

draw in new investments, IKEA will larger enjoy coming into the market through

Foreign Direct Investment via than from International Franchising. Moreover, by

mistreatment FDI as a technique, IKEA will acquire national resources and access

different South yank markets.

According to Dunning’s Ecletic Theory (Griffin and Pustay, 2009), FDI can occur

once 3 conditions - possession, Location and learning - area unit happy. By

matching IKEA’s Swot analysis and every one the opposite info gathered during this

work, it\'s potential to watch that IKEA enjoys all 3 benefits in competitory in Brazil

against native corporations.

1. Ownership: Whereas most of Brazilian furnishings retails hold low complete image

and average technology systems, IKEA has distinctive competitive benefits like

sturdy brand globally, advanced technology and also the edges of economies of

scale in different markets.

2. Location Advantage: IKEA will relish lower labour prices, avoid tariff walls on

merchandise exported from Brazil to different South yank countries and save cash

on product transportation – rather than importation merchandise from China, Russia

and Asian country, the bulk of merchandise will be factory-made in Brazil owing to its

huge resource endowments.

3. learning Advantage: owing to growing considerations associated with

management of material possession rights, deforestation and corruption in Brazil,

IKEA can profit additional from dominant its operations in Brazil than from hiring

freelance native firms to supply such services.

FDI via Greenfield Strategy and Strategic Alliance

As Brazilian furnishings Retailers area unit comparatively tiny, the chance to amass

associate degree existing company with the intention of getting management over

staff, technology and stores is incredibly low. Therefore, IKEA would need to begin

its operations from scratch. in keeping with gryphon and Pustay, 2010, once firms

obtain or build new facilities, hires in managers and staff to launch its different

operations, they are doing thus through Greenfield Strategy.

Given all the facts that influence FDI in Brazil, the Greenfield Strategy will actually

profit IKEA’s entry to the Brazilian marketplace for the subsequent reasons:

Brazil’s native and national government provides economic development incentives

to draw in firms facilities. However, the Greenfield Strategy additionally has its

disadvantages:

The process of building a replacement website, hiring new employees and

negotiating with government is comparatively long and expensive

In order to market bound regions development, Brazilian government may

need IKEA to create its website during a determined place that's not IKEA’s

desired location.

Grant to use natural resources may well be given underneath terribly prohibit

rules owing to international and national demand for property merchandise

Furthermore, by mistreatment Brazil’s endowment resources, notably within the

biological science sector, IKEA’s CSR would be dose any scrutiny. However, as

IKEA has such a lot of comes that are benefiting the biological science and also the

cotton sector (refer to IKEA’s CSR) in such a lot of countries IKEA will mix its current

CSR follow and type a strategic alliance with the Brazilian government involving the

assembly side of the business.

A strategic alliance involving public and personal partners will profit a corporation if

negotiation is handled properly and if the govt. is comparatively stable, by easing

market entry, reducing risks, enhancing information and experience and giving

competitive advantage.

Reference:

Appendix 1

Detailed 5 Forces Analysis for the world Retail furnishings Market

(Adapted from Datamonitor, 2009).

Appendix 2

Continuation of 5 Forces Analysis on the South yank Retail furnishings (Source:

Datamonitor, 2009)

Appendix 3

Based and refered from http://www.ukessays.com/essays/marketing/ikea-is-

the-worlds-largest-furniture-retailer-marketing-essay.php#ixzz2kZCYyIMp.

Custom-made from Datamonitor, 2009- report

(Source: IKEA cluster, Panda.org, United Nations Children\'s Fund and

SaveTheChildren.com, 2009).