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Marketing and Services Management TITLE OF ASSIGNMENT: INTERIM ASSIGNMENT BASED ON IKEA CASE STUDY

Submitted to Dr. Roy Damary and Dr. Peter McGregor

Date 28th June, 2015

Type of Assignment Individual

Submitted by

Name of Student Sanjay Vaid

Roll No 00436743

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Contents

Introduction .................................................................................................4

Marketing Mix: ............................................................................................4

The first P: Product: ...................................................................................4

The Second P: Pricing ................................................................................6

The third P: Place.......................................................................................7

The Fourth P: Promotion .............................................................................8

The fifth P: People and internal marketing .....................................................9

The Sixth P: Physical evidence .................................................................. 10

The Seventh P: Process Management.......................................................... 11

Analyses of Environment IKEA has to operate ............................................... 12

Macro level analysis ................................................................................. 13

The Political Environment:........................................................................ 13

Economic Environment ............................................................................ 14

Social Factors: ......................................................................................... 15

Technology Factors: ................................................................................. 17

Environment Factor: ................................................................................. 18

Legal Factor: ........................................................................................... 18

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Industry level Analysis ............................................................................. 18

Porter’s 5 forces Analysis:......................................................................... 18

Rivalry amongst competing firms: ........................................................... 18

Threat of new entrant: ............................................................................ 19

Threat of substitutes: ............................................................................. 19

Bargaining power of Supplier: ................................................................ 19

Bargaining power of buyer: .................................................................... 19

Evaluation of the quality and sustainability of the Ikea offering in the context of its

marketing mix and marketing environment:.................................................... 19

Product: ............................................................................................... 19

Price: ................................................................................................... 20

Place and Positioning:............................................................................ 20

Works Cited ............................................................................................... 21

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Introduction

Since its 1943 foundation in Sweden, IKEA has offered functional home furniture and

accessories of good design at low prices so that people can afford the same. The author shall do

the analysis for Ikea taking in view India as the market; the marketing mix would be universal as

Ikea follows standardization process and offers Scandinavian design in its furniture.

Marketing Mix:

“In practice, the core of marketing is considered as the marketing mix. Dr. Ravi Shankar in his

book has cited Neil Borden, who further quotes from an article by James Culliton that a

marketer is viewed by a ‘decider’, or an ‘artist’ or a mix of ingredients’ who plans various

means of competition” – (Shankar, 2002) (Borden, 1964) (Cullition, 1948)

The first P: Product:

Product in the marketing context is anything offered to a market for the exchange or

consumption. In good markets like that of Ikea, we would say that there is an intangible

component to which intangibles like a style, after-sales-services, credit etc., are integrated.

Ikea provides highly functional quality furniture at a low price with a goal to “create a better

everyday life for the many people” which is their core product. Ikea has a wide range of very

well designed home furnishing products and complements these tangible products with

intangible service options online order taking process, picking, transferring and assembling the

furniture which also the augmented value.

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“Kotler has identified five levels of a product. It is the core and basic which might be the same

for most competing products while it’s other level that makes the difference.” (Kotler, Marketing

Management: Millennium Edition, 1999)

Table 1.1 Five Product level

Core Product The fundamental benefit or service that the

customer is buying.

Basic Product Basic, functional attributes

Expected Product Set of attributes/Conditions the buyer normally

expects

Augmented Product That meets the customers desire beyond

expectations

Potential Product The possible evolution to distinguish the offer.

Gronroos constructed that the services a product offer consists of three levels as shown in figure

1.2 below, the first level is basic service level consisting of core services, supporting services and

facilitating services. The second level is of augmented services offering where accessibility,

interaction, and customer participation is given equal importance in delivering the service

product. The third level is that of market communication of the service offering as in its absence

the augmentation services package does not have any relevance to the customer (Gronoos, 1987)

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The Second P: Pricing

Pricing is linked to demand any increase or decrease in prices affect demand, similarly prices

also tend to increase perceived value, for example, a high-cost product is perceived to be of

better quality and better post-sales support and service.

The Core Product

Supportin

g services Faci

litat

in

g Se

rvic

es

The Service Concept

Interaction

Acc

essi

bilit

y

of

the

serv

ices

Consumer Participation

Cor

pora

te Im

age

Wor

d of

Mou

th

Marketing Communication

Figure 1.2: Image, Communication and Augmented

Services

\Offering.

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In setting price objective, several factors related marketing strategy should be considered:

First is the plan the market position of the product. “Gitlow suggested that price not only

influences the market position but also significantly affects customers' perceptual positioning. It

is therefore important to keep market/customer position in mind while deciding on pricing

strategy. (Gitlow, 1978) Secondly, the stage of the lifecycle of a product is important for setting

price as during the introductory stage if the demand is high and no or low completion prices can

be high which is a skimming policy similarly if the demand is low and competition is higher than

market penetration policy can be used for lowering the price. Also, the elasticity of demand

needs to be considered if the demand is sensitive to change in price.

Thirdly an in-depth understanding of competition needs is to be conducted in terms of brands,

substitute products, and complementary products.

Lastly, we need to consider the strategic role of pricing in the overall marketing mix for example,

Ikea can introduce package deals and discount which can enable customer use their products this

might be a losing proposition in short but in the long run this would increase customer mindshare

and likely hood of them buying the IKEA product due to experience they had with the products

they bought with discount or in package deal.

Ikea offers reasonable and affordable price for the furniture, they use large volumes and fa

packaging to cut cost.

The Third P: Place

There are 2 methods to sell channel and direct, direct, traditional channel involved distributors

and multi-brand or exclusive retail stores, but new age retail channel also includes online internet

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based selling via intermediaries like amazon, eBay, Argos, Tesco etc., direct channel is Ikea own

stores, Ikea own website through which they offer B-to-C online product as well.

Ikea has over 360 stores in around 50 countries; In July 2014, Ikea opened its foremost store in

India in the town of Hyderabad and is expected to open stores in Bangalore, Mumbai, and Delhi

soon.

Ike Smaland is a play zone is in every Ikea store. Parents leave the kids at the entrance to the

park and pick them up following their return. This allows undivided attention from parents and

they experience products and get navigated around the store in by the store employees

The Fourth P: Promotion

The Promotion is also called the marketing communications mix, consisting a blend of

advertising, sales promotion, public relation, personal selling and direct marketing. Ikea uses

both pulls and pushes strategy.

“In the service sector, there is a direct contact between the person who provides the service and

the consumer, therefore, some amount of promotion should be targeted at the employees so to

motivate them to serve the customer better. In such communication, the objective can also be to

educate the employee about how to handle operational problems and customer handling so as to

increase their performance level. The other set of the audience is similar to that of goods where

the target audience may not necessarily be the buyer or user, but also the influencers, decider or

user of the buying cycle” (Shankar, 2002)

Apart from TV advertising, newspaper, brochure Ikea also conducts internet marketing

advertising on various sites and social media. Ikea also pays a lot of importance to environmental

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and ethical issue; they cooperate with UNICEF, Worldwide fund for nature (WWF) which

contributes a lot to building a favorable corporate image and good public relationship.

The ‘Ikea Catalogue’ is a list issued yearly by Swedish home furnishing retail merchant IKEA.

First issued, in the Swedish Language in 1951, the list is deemed to be a principle promotion tool

of the company and as of 2004, consumes 70% of its annual marketing budget. Worldwide,

approximately 208 million copies of the catalog were printed in the year 2014 with 62 different

versions of the catalog created in 43 countries. The Catalogue is now available online as well.

The fifth P: People and internal marketing

“Judd, in 1987, came with yet another ‘P’, people. Judds argument was that it is the employees,

which represent the organization to the customer. If these employees are not given training on

how to go about face-to-face customer contact, the entire marketing effort may not prove to be

effective.” (Judd, 1987)

Strategic Objective of Internal Marketing

Overall Objectives To develop motivated and customer-conscious personnel

Strategic level

Objective

To create internal environment the supports customer-consciousness and

sales-mindedness amongst the personnel through supportive:

Management methods

Personnel policy

Internal trading policy

Planning and control procedures.

Source: (Gronross, 1981)

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Ikea has a well-trained and motivated Frontline and back-end team, the front line team engages

with customers directly in person, over phone or face-to-face this includes the sales team, which

helps the customer decide and help buy the furniture, the phone based support and sales and on-

site assembly team for customers who chose the not do it your self-option.

The Sixth P: Physical evidence

G Lynn Shostack once observed. “A physical object is self-defining a Service is not.” And

therefore the marketing task in service industries is “definitions for the service what the service

cannot define for itself.” (Shostack G. L., 1987)

Although a consumer cannot see a service, but definitely he can see various tangible clues of the

service offer like facilities, communication, material, objects, employees, other customers, price,

etc. On the basis of his perception of the tangible clues, the customer makes the purchase

decision.

In services marketing, both peripheral and essential evidence is significant as they aid in

providing the tangible experience of service to the consumer. Peripheral evidence can be

possessed as a part of the service purchased while essential evidence, on the other hand cannot

be possessed.

McGrath added two more Ps: Physical Facilities and Process management, his argument in

support of these P’s was that the physical facilities are important in facilitating the delivery of

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services. (Macgrath, 1986)

Figure 1.3 The three Elements of Service Evidence

“As per Berry and Parsuraman physical environment is one of the three elements. The other two

elements are communication and price as shown in figure 1.3. There three elements are not

mutually exclusive, but rather they influence each other.”(Berry & Parasuraman, 1991)

Ikea has no of showrooms across the world the product design, the facilities, the ambience, the

facility design, the social factors like behaviors, number of services, personal, and children

playing area, recreation facility like restaurants, quality and quantity of other customer, it own

vehicles that deliver the product all of them lead to physical evidence influencing customers,

employees, and influencers.

The Seventh P: Process Management

The importance of process management is that it assures service availability and consistent

quality.

Price

Communication

Enviroment

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Ikea selling process is less complex and has some divergence in term of options for customers to

buy online or directly from store and option of delivery or assemble services for products. The

process is standardized.

“Shostack describes process in two ways: The first way is as per steps and sequences that

constitute the process and she termed it as ‘complexity of processes. The second according to

the exceptional latitude or variability of those steps and sequence, which she called ‘divergence’.

Any service process is a combination of both complexity and divergence.” (Shostack G. L.,

1987)

Analyses of Environment IKEA has to operate

The business environment if often divided external macro environment, the external industry

environment.

Exhibit 1.4 Drivers for global strategic perspective

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Macro level analysis

The Macro level environment consists of Political, social, economic, Technology, Environment

and Legal factors (PESTLE).

The retail sector is India is expected to be worth US$ 675 billion by 2016 and its fractured and

disorganized nature means that it's huge potential for consolidation or entry of an outside player.

The Political Environment:

The government can have a major impact on business by imposing regulations, the level of

taxation, import duties, and provide subsidies to certain firms.

Business strategies are now also affected by global institutions like World trade organization and

regional economic blocks like The European Union, NAFTA, and the Association of South

Asian Nations (ASIAN) Free Trade Area (AFTA). (Geogrge & Mellahi, 2011)

Hence, multinational firms need to pay attention to a complete set of important political issues,

regional economic integration, government legislation, political risk, tax policy and corruption.

The Foreign Investment promotion board has given approval to IKEA to invest INR 10,500

Crore and they plan to open 25 stores in 10 years, they have already opened a store in Hyderabad

and new stores are expected in Mumbai, Delhi and Bangalore soon.

http://articles.economictimes.indiatimes.com/2014-09-17/news/54024673_1_furniture-retailer-

new-stores-large-format-stores

India is both a sourcing country as well key market for IKEA and with India is a labor abundant

country the government would like Ikea to invest in India, which creates employment and for

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IKEA India is the second largest country in terms of population and growing hence a key market.

Also, India has been sourcing market for Ikea for 25 years.

India and the EU are working towards Bilateral trade agreement (BITA) for which frame has

already been agreed and government of India is now at an advanced stage talk with the European

Union (EU) to conclude BITA, commonly known as EU-India Free trade agreement. Since

Sweden is part of the EU, which is the country of Origin of IKEA it stands to benefit from the

bilateral trade agreement.

Economic Environment

Changes in economic business environment can influence a firm’s expansion. Exchange rate,

cost of production, cost of capital, inflation and cost of living, working –age population,

unemployment, Debt – internal and external, Income distribution, Urban verse rural income,

labor cost, poverty, productivity, Balance of payment are to be considered while analyzing

economic environment.

Other factors that are to be taken into consideration are Gross National income, Gross Domestic

Products, Per Capita Conversion, Rate of change, Purchasing power parity, Degree of Human

development, Green Measure of GNP (Daniels, Radebaugh, Sullivan, & Salwan, 2009)

- Indian GDP in 2014-15 is US$ 1.68trillion

- Gross Value added at basic price is 7.5 percent.

- Per Capita Income for 2014-15 is US$ 1166.48

- Growth in per capita income is 6.1 percent.

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- Purchasing power parity: 7,996.6 US$ ranked 3rd in the world and 6.4 percent share of global

GDP on a PPP basis.

- Population 1.2 billion

- External Debt (end-December 2014) – US $ 461.9 billion

- Long-term debt – US $ 376.4 billion

- Short-term debt – US$ 85.6 billion.

- Reserves: US$ 355.4593 billion

- Cumulative Foreign Direct Investment inflow: US$ 373.163 Billion (Between April 200 to

April 2015)

Income level of Indians is increasing and they aspire for the better quality of life; spending by

average Indian is more than ever before.

India is also a high potential market for luxury retail furniture and for office furniture which is a

large market due development work happening in India and 100 new smart cities proposed by

the government of India.

India also provides for low cost labor, raw material, production and supply chain which can be

used for exports by IKEA as well as its mainland is well connected via train and road to its

seaports and has land routes to Asia Pacific, Central Asia, Persia, Middle East as well.

Social Factors:

Social factors are extremely important for marketers to understand before they plan and enter a

market. Information related to population, age group, cultural values and attitudes, accepted

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norms, education, social institutions, manners and customs, ethical dimension, religion,

Languages, Hofstede index -power distance, individualism, masculinity are important to gather

before making any marketing plans and market entry strategy.

Regional Languages in India: Assamese, Bengali, Gujrati, Hindi, Kannada, Kashmiri,

Malayalam, Manipuri, Marathi, Nepali, Oriya, Punjabi, Sanskrit, Santali, Sindhi, Tamil, Telugu,

Urdu.

Hofstede Index for India:

- Power distance 77

- Individualism 48

- Masculinity 56

- Uncertainty Avoidance 40

- Long term orientation 51

- Indulgence 26

Population Facts:

- Age Group 15- 19 – 9.7% (Source: Ministry of Home affairs)

- Age group 20-24 – 8.7%

- Age group 25-44 – 27%

- Age group 45-64 – 13%

- India, Middle class: 267 million people.

India has rising middle class and 48.7% of the population is working adults, hence there is high

potential demand, the furniture retail segment is getting organized and currently there are multi-

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brand outlet chains like hometown, Fab furniture etc. and there is high demand for furniture

fueled by multiple segment requirements within home furnishing.

India is also going through social transformation where due to technology, information sharing in

happening across the country, more children are getting education and India is transforming into

a modern nation with its deep routed ethics and value system intact.

Technology Factors:

Technology has changed the way business was conducted and technology can influence the

business success. Technology directly impacts organizational efficiency and can reduce any

efficiency loss making the firm more competitive.

“Three important things to consider are global technology scanning and technology clusters, the

rise of knowledge-based economy and spread of internet” (Geogrge & Mellahi, 2011)

- Broadband users in India: 243.9 million

- Mobile users in India: 962.34 million

- Smart Phone users in India: 167.9 million (3rd largest in the world)

India has high-speed internet access, data centers, secure payment gateways, cyber laws, growing

and high penetration into mobile, broadband and smartphone users, which can be effectively

used by Ikea in their e-commerce sales and supply chain management thus enabling high

efficiency, lower cost, higher profits and revenue for Ikea in India.

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Environment Factor:

The two important environmental factors that relate to IKEA are wood for furniture which is

produced by cutting trees and other is power both have environmental effects in terms of carbon

and greenhouse gas emission leading to environmental concerns.

There is an environment clearance process India, Ikea would have to go through the same and

comply to ensure that they have requisite clearance especially in case of manufacturing in India.

Legal Factor:

The legal acts that concern Ikea in India are Foreign Exchange Management Act, 1999 and a

regulation made thereunder competition act, 2002 (‘FEMA’), The companies Act, 1956,

Securities and Exchange board of India Act, and regulations made thereunder, Income tax act,

1961, stamp duty laws, health and safety law, Labor laws, consumer laws. IEKA should ensure

that they have a good understanding of the law and comply with same before venturing or

expanding their business in India.

Industry level Analysis

Porter’s 5 forces Analysis:

Rivalry amongst competing firms: Indian Retail furniture market can be categorized in

organized and non-organized player and at present the number of organized companies is low

Fab-India, Hometown, Godrej Furniture as against globally were there it is high with players like

Walmart, Argos, Tesco, Target etc. are in retail furniture.

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Threat of new entrant: India has high amount of unorganized retailer as the capital expense is

low, however, as we have seen which other organized retailers who bring standardization and

economies of scale and Scope, high capital the threat of new entrant is then low as the author has

observed it is difficult for new players to replicate the process and best practice at a large country

wide level.

Threat of substitutes: The presence of substitute products puts a ceiling on the price that can

be charged hence reducing profitability. In case of Ikea, the threat of substitute product is low.

Bargaining power of Supplier: Since there are few dominant buyers and product have

differentiations hence the bargaining power of supplier is low.

Bargaining power of buyer: the bargaining power of the consumer is high as they can switch

to competing brand or substitutes.

Evaluation of the quality and sustainability of the Ikea offering in the

context of its marketing mix and marketing environment:

“Sustainable marketing calls for meeting the present needs of consumers and business while also

preserving and enhancing the ability of future generations to meet their needs.” (Kotler,

Armstrong, Agnihotri, & Haque, 2013, p. 498)

Ikea provides quality and sustainable offering in its marketing mix and environment.

Product: Ikea adopted environment action plan included 10 key initiatives

1. Replace polyvinyl chloride (PVC) in wallpaper, home textiles, and showers.

2. Minimize the use of formaldehyde in its products.

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3. Produce a model of chair (OGLA) made from 100% pre-consumer plastic.

4. Introduce a series of air inflatable furniture products in the product line to reduce the use of

raw material and transportation weight and volume.

5. Eliminate acid-curing lacquers.

6. Reduce the use of chromium of metal surface treatment.

7. Limit the use of substances such as cadmium, lead, PCP, and AZO.

8. Use wood from the responsible managed forest that replants and maintain biological

diversity.

9. Use only recycles material for flat packaging and “pure” (non-mixed) material for packaging

to assist in recycling.

10. Introduce rental bicycles with trailers for customers in Denmark.

Ikea introduced IWAT Code of Conduct for supplier which outlines work to reduce waste and

emission to air, ground and water, handle chemical safely etc.

Price: Ikea provides people with good furniture at a sustainable lower price, however with good

quality.

Place and Positioning: : Ikea focus to sound environment information and provide

environmental friendly alternative for acquiring IKEA products, this includes marketing

material, a catalog of products on none- chlorine bleached paper and use pulp for framing wood;

Limiting its catalog production to one catalog per year and accepting old catalog back at store for

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recycling , free shuttle buses from selected cities locations to several stores in Europe; allowing

customers to deposit old furniture before purchasing new furniture at some stores in Switzerland.

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York: The Free Press.

Borden, N. H. (1964). The Concept of Marketing Mix. 2-7.

Cullition, J. W. (1948). The Management of Marketing Costs. Boston: Division of Research,

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Daniels, J. D., Radebaugh, L. H., Sullivan, D. P., & Salwan, P. (2009). International Business:

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Gronross, C. (1981). Internal Marketing n integral part of marketing theory. (H. J. Donnelly, &

R. W. George, Eds.) Marketing of Services.

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