VIGNANA JYOTHI INSTITUTE OF

MANAGEMENT

TOPIC

PESTEL ANALYSIS OF IKEA ENTERING INTO INDIAN MARKET

SUBMITTED TO

Mr. Sanjay Prasad G, Research Asst

Prepared by

Surya Deepak Goud

INTRODUCTION

ABOUT THE COMPANY

IKEA was founded in 1943 by Ingvar Kamprad and has turned into an international

furniture retailer, which specialises in stylish but inexpensive Scandinavian designed

furniture. It is a privately held retailer chain that sells flat pack furniture, bathroom and

kitchen accessories all over the world, which specialises in stylish but inexpensive

Scandinavian designed furniture. IKEA is an acronym. Since 1943, Ikea has expanded its

operations steadily in many countries with most of the stores of the company concentrated in

Europe, USA, Canada, Asia and Australia. The IKEA group also has existence in Israel and

Middle East. IKEA originally started by selling picture frames, wallets, pens, watches, table

runners, jewellery, and nylon stockings etc. Furniture was first added in the year 1948 and

IKEA started manufacturing its own furniture since 1955, providing furniture that could be

self-assembled at relatively low cost. Since then, the name has been synonymous with self-

assembled furniture.

Its success in the retail industry is due to the fact that the company has a vast

experience in the retail market, product differentiation, and cost leadership. Their unique

concept is that furniture is sold in kits that are assembled by the customers at home. The

company remains one of the world’s most successful multinational retailing firms, operating

as a global

VISION :- The IKEA vision globally is to create a better everyday life for the many.

MISSION:- At IKEA Tempe we are dedicated to giving to the local community well being

regarded by our customers and co-workers as a social responsible company"

PESTEL ANALYSIS OF IKEA ENTERING INTO INDIAN MARKET

POLITICAL FACTORS

Political factors are how and to what degree a government intervenes in the

economy,it includes

• Constitutional System

• Stability of Government

• Business Freedom

• Trade Freedom

• Tax Policy

The decision of Swedish retailer IKEA, the world's largest furniture maker, to

invest Rs 10,500 crore in India will send a positive signal to other investors who have

turned hesitant in view of the UPA government's policy drift on foreign direct

investment. India is in desperate need for such FDI which will bring modern

technology. Ikea's decision to enter India comes on the heels of the Indian

government's decision to relax the rules on single brand foreign retailers in the

country. Ikea will now have to source at least 30% of its production from the Indian

market.

Foreign direct investment in supermarkets has hit a political hurdle as it is

seen as a threat to owners of local mom and pop stores which account for roughly 90

per cent of India's $450 billion retail sector.

The fact that the more progressive agricultural states such as Punjab and

Maharashtra are in favour of FDI in retail stems from the fact that modern storage

facilities will ensure better prices for farmers who are currently at the mercy of middle

men. India offers IKEA a huge new market while the government is battling heavy

criticism over its management of Asia's third-largest economy where growth has

slipped to its weakest pace in nine years.

India has rebuffed a request by IKEA to relax rules on buying goods locally,

raising the prospect of a delay in the world's largest furniture maker entering the

Indian retail market.

ECONOMIC FACTORS:

Economic factors include

• Economic Growth

• Exchange Rates

• GDP Growth

• Globalisation

• Interest Rates

• Inflation Rate (cost of capital)

• Labour Costs

• Unemployment Rate

GDP $1.676 trillion (nominal: 11th; 2011)

$4.457 trillion (PPP: 3rd; 2011)

GDP growth 6.5%

GDP per capita $1,389 (nominal: 140th; 2011)

$3,694 (PPP: 129th; 2011)

Inflation (CPI) 6.87% (July 2012)

Labour forces 487.6 million (2011 est.)

Unemployment 9.8% (2011 est.)

Average gross salary $1,410 yearly (2011)

Exports $298.2 billion (2011 est.)

Imports $451 billion (2011 est.)

FDI stock $36.5 billion (2011-12)

IKEA's low prices create appeal amongst its customers in tough financial times. It is

vital to keep prices as low as possible when the retail sector is depressed. IKEA's pricing

strategy targets consumers with limited financial resources. Its products will also appeal to

those with higher budgets through good quality and design. The company must ensure that it

is always recognised as having the lowest prices on the market in the future.

The fluctuating commodity and raw material prices in

INDIA result in rising purchasing costs for IKEA. This will have an impact on the

margins of the organization and might lead to passing over the cost to consumers by

increasing prices of most things in the supermarket. Furthermore, rising fuel costs will

have implications right throughout the supply chain of IKEA leading to an overall

situation of increasing prices, resulting in decreased competitiveness. The credit

crunch can impact IKEA negatively as it might decrease the purchasing power of

consumers and though they will still buy the essentials they may be more cautious.

Furthermore, furniture, unlike fast moving consumer goods, are durable and can last

for several years and in such economic uncertainty. Consumers may be reluctant to

change what they perceive to be still serviceable sets. They may also spend less on

luxury items, something that has a greater profit margin for IKEA. All this may result

in lowered sales and thus, reduced margins for the firm .At the same time, IKEA may

also face stiffer competition from local small retailers who offer furniture at more

affordable prices- something which will appeal to cost conscious consumers. This

may cause IKEA to reduce its margins, affecting profitability.

SOCIAL FACTORS:

Population Growth Rate

Age Distribution

Perception of Safety.

Educational Infrastructure

Employment Patterns

Cultural Taboos

Population: 1,210,193,422 (2011 est.) (2nd)

Growth rate: 1. 41% (2009 est.) (93rd)

Population 29.8%(2010)

below poverty line (Note: 32.7% live on less than $1.25 a day

68.7% live on less than $2 a day)[3]

Life expectancy: 69.89 years (2009 est.)

–male: 67.46 years (2009 est.)

–female: 72.61 years (2009 est.)

Infant mortality rate: 30.15 deaths/1,000 live births (2009 est.)

Age structure

0-14 years: 31.1% (male 190,075,426/female 172,799,553) (2009

est.)

15-64 years: 63.6% (male 381,446,079/female 359,802,209) (2009

est.)

Regional language(s): Assamese • Bengali •Gujarati • Standard Hindi •

Kannada • Kashmiri • Malayalam • Manipuri • Marathi • Nepali •

Oriya • Punjabi • • Sanskrit • Santali • Sindhi • Tamil • Telugu • Urdu

As Ikea forays into the lesser tap markets of India, social factors may also come into

play. Asian societies are generally more savers than spenders and in such economic certainty,

Asian consumers may be unwilling to spend on new furniture, preferring to save for a rainy

day. At the same time, the more affluent consumers who are able to spend may be unwilling

to buy products from Ikea which has a reputation of requiring self-assembly.

TECHNOLOGICAL FACTORS

Technological factors include technological aspects such as R&D activity,

automation, technology incentives and the rate of technological change. They can

determine barriers to entry, minimum efficient production level and influence

outsourcing decisions. Furthermore, technological shifts can affect costs, quality, and

lead to innovation.

• Emerging Technologies

• Impact of Internet, Reduced Communication Costs

• Rate of Technological Change

• R&D Activity (SEZs)

• Technology Incentives

• Technology Transfer

RFID (Radio Frequency Identification Device) technology can be used for

significant benefits to the supply chain of IKEA. If adopted, this technology will lead

to less inventory for the supermarket firms resulting in lower cost for the company

which could translate into cheaper prices.

The IKEA used quality technology and systems to promote the shorter

queues, proper scheduling, tracking and trading patterns, and staffing. It aims to be

more productive and establish employee preferences. The system made the IKEA in a

position to ensure the right number of staff in a right place and in a right time to

match the unique trading pattern s at each stores of IKEA. The company view in

optimizing everything from the supply chain is also optimizing and managing the

workforce to create an efficient store environment and keep customers happy

ENVIRONMENTAL FACTORS

Environmental factors include ecological and environmental aspects such as

weather, climate, and climate change, which may especially affect industries such as

tourism, farming, and insurance. Furthermore, growing awareness of the potential

impacts of climate change is affecting how companies operate and the products they

offer, both creating new markets and diminishing or destroying existing ones.

The government takes serious matter on protecting the environment where

they impose many regulations and laws in protecting, preventing and controlling

industrial pollution and improving urban environment. The government also

collaborate with many NGO’s in order to maintain the Mother Nature

India is the second most populated country in the world with about 1.2 billion

inhabitants. Ports, Airports and a sufficient railway system are the basis for the

countries decent infrastructure. Additionally, India is the largest democracy in the

world and has a very stable political

Although, India ranks 122nd in the world when it comes to the ease of doing

business, one can say that the general economic environment is favourable for IKEA.

There has been constant GDP growth in the last couple of years and the Indian rupee

is relatively stable as well.

India’s society has been influenced by a very strong caste system in the past

which prevented many people from freely choosing what work or business to enter.

This has changed and urban regions tend to be more liberal concerning initial cast

affiliation than the rural areas. As far as the technological environment is concerned,

India’s population is increasingly connected to the Internet but still behind in the

international comparison. The Indian climate is quiet diverse due to the country’s

enormous size. As there are colder and warmer regions, the consumption behaviour

can differ on a regional level due to the diverse climate.

Environmental - With regards to the environmental factors such as the air, noise, and

water, inspections are implemented to ensure the company provides corrective actions

within the stipulated time. The environmental inspection is part of the legal

documentation and environmental authorities as the business operations are on-goings

and maintains the competence.

LEGAL FACTORS

Consumer Law

Discrimination Law

Employment Law

Health and Safety Laws

legal compliance of IKEA is strictly implemented with the relevant and applicable

laws and regulations that pertain to the environment, social and working conditions. The

company also scheduled the most demanding requirements to be specific in maintaining

the list of laws and regulations and with the procedures.

1. Legal

Suppliers must comply with national laws and regulations and with international

conventions concerning the protection of the environment, working conditions and

regarding child labour.

2. Working conditions

IKEA expects its suppliers to respect fundamental human rights, and to treat their

workforce fairly and with respect.

Suppliers must:

• Provide a healthy and safe working environment;

• Pay the legal minimum wage or the local industry standard and compensate for

overtime;

• If housing facilities are provided, ensure reasonable privacy, quietness and personal

hygiene.

Suppliers must not:

• Make use of child labour.

• Make use of forced or bonded labour.

• Use illegal overtime.

• Accept any form of mental or physical disciplinary action, including harassment.

3. Environment and forestry

At IKEA, we shall always strive to minimize any possible damaging effects to the

environment, which may result as a consequence of our activities. Therefore, IKEA and

its suppliers shall continuously reduce the environmental impacts of operations.

Suppliers must:

• Reduce waste and emissions to air, ground and water;

• Contribute to the recycling of materials and used products;

Suppliers must not:

• Use or exceed the use of substances forbidden or restricted in the IKEA list of '

Chemical Compounds and Substances';

• Use wood originating from national parks, nature reserves, intact natural forests or

any areas with officially declared high conservation values, unless certified

IKEA Porter’s Five Forces Analysis

Rivalry among existing firms

It is intense in the global market of discount furniture and the major players in the

industry include Euromarket Designs Inc, Galiform plc, Wal-Mart Stores Inc, Argos and

others. However, currently IKEA is the undisputed market leader in the industry of

discounted furniture in the global scale.

Threats of New entrants to an industry can raise the level of competition, thereby reducing its

attractiveness. The threat of new entrants largely depends on the barriers to entry. High entry

barriers exist in some industries . whereas other industries are very easy to enter .Key barriers

to entry include

- Economies of scale

- Capital / investment requirements

- Customer switching costs

- Access to industry distribution channels

- The likelihood of retaliation from existing industry players.

Threat of Substitutes

The presence of substitute products can lower industry attractiveness and

profitability because they limit price levels.

The threat of substitute products depends on:

- Buyers' willingness to substitute

- The relative price and performance of substitutes

- The costs of switching to substitutes

Bargaining Power of Suppliers

Suppliers are the businesses that supply materials & other products into the

industry. The cost of items bought from suppliers (e.g. raw materials, components)

can have a significant impact on a company's profitability. If suppliers have high

bargaining power over a company, then the company's industry is less attractive. The

bargaining power of suppliers will be high when

- There are many buyers and few dominant suppliers

- There are undifferentiated, highly valued products

As an example of IKEA, in recent years, had heard from its customers that

many of its furniture offerings were too complicated to be assembled by the customer;

showing the power of the supplier to make a difference, IKEA has gotten cooperation

from some suppliers to provide materials that are easier for the customer to assemble,

thereby adding value to the supplier relationship.

Bargaining Power of Buyers

Buyers are the people / organisations who create demand in an industry. The

bargaining power of buyers is greater when there are few dominant buyers and many

sellers in the industry and the products are standardised. Buyers have a great deal of

influence over IKEA's product line and direction, for example, in the 1960s, IKEA

developed the ability to package its unassembled furniture in flat cartons, making it

easier for the buyer to handle the cartons.

CONCLUSION

The IKEA group is one of the world’s largest home furnishings companies.

The company considered various values in the incorporation of their supply chain as

part of their process in learning. The company, known for huge stores selling flat pack

furniture and accessories, it would invest 1.5 billion euros to open 25 stores in Asia's

third-largest economy after initially balking at India's sourcing requirements. The

Indian government is also relaxing some of the local sourcing conditions to make it

easier for IKEA and other foreign retailers to enter India.

References:

http://www.papercamp.com/group/ikea-swot/page-0

http://www.youtube.com/watch?v=hBewYCLS5jw

http://www.businessteacher.org.uk/business-resources/swot-analysis-database/ikea-

swot-analysis/

http://www.ikea.com/us/en/customerservices/faq#faqAnswers3-

http://ibnlive.in.com/news/ikea-to-enter-india-invest-15-bln-euros-in-stores/267678-

7.htmlhttp://article.wn.com/view/2012/06/24/IKEA_Knocks_on_Indias_Doo

http://www.oppapers.com/essays/Mkt-421-Environmental-Factors/7933

http://articles.economictimes.indiatimes.com/2012-08-07/news/33083662_1_ikea-

foreign-retailers-swedish-meatballs

http://www.authorstream.com/Presentation/FenellaAndrade-1178086-ikea/