case study IKEA

Couching Tiger Tames the Dragon

Everything under the sun: Local shoppers at an IKEA furniture store in Chinas Chengdu city

Executive Summary
IKEA is known globally for its low prices and innovatively designed furniture. In China, however, it faced peculiar problems. Its low-price strategy created confusion among aspirational Chinese consumers while local competitors copied its designs. This case study analyses how IKEA adapted its strategies to expand and become profitable in China. It also assesses some lessons the company learnt in China that might be useful in India, where it plans to open its first store by 2014 and 25 stores in 10 to 15 years.
By Valerie Chu, Alka Girdhar and Rajal Sood

wedish furniture giant IKEA was founded by entrepreneur Ingvar Kamprad in 1943. He began by selling pens, wallets and watches by going door to door to his customers. When he started selling his low-priced furniture, his rivals did everything to stop him. Local suppliers were banned from providing raw material and furniture to IKEA, and the company was not allowed to showcase its furniture in industry exhibitions. What did IKEA do? It innovated to stay in business. It learnt how to design its own furniture, bought raw material from suppliers in Poland, and created its own exhibitions. Today, IKEA is the worlds largest furniture retail chain and has more than 300 stores globally. In 1998, IKEA started its retail operations in China. To meet local laws, it formed a joint venture. The venture served as a good platform to test the market, understand local needs, and adapt its strategies accordingly. It understood early on that Chinese apartments were small and customers required functional, modular solutions. The company made slight modifications to its furniture to meet local needs. The store layouts reflected the typical sizes of apartments and also included a balcony. IKEA had faced similar problems previously when it entered the United States. The company initially tried to replicate its existing business model and products in the US. But it had to customize its products based on local needs. American customers, for instance, demanded bigger beds and bigger closets. IKEA had to make a number of changes to its marketing strategy in the US. The challenges it faced in China, however, were far bigger than the ones in the US. As the company opened more stores from Beijing to Shanghai, the companys revenue grew rapidly. In

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. IKEA identified the strategic challenges and made attempts to overcome them. One of the main prob-

and raw materials, and because their design costs were usually nil. IKEA built a number of factories in China and increased local sourcing of materials. While globally 30 per cent of IKEAs range comes from China, about 65 per cent of the vol-

How IKEAs strategies differ in Europe and China

Europe
Value Proposition
Good quality, stylish furniture at prices so low that everybody can afford it Good quality, Western-styled aspirational brand for the middle-class population

China

Valued NETWORK

Product
Stylish, functional products and home furnishings

Slight modifications to products to suit the local market and reflect Chinese apartment sizes The outskirts of cities, next to rail networks as most customers use public transport Affordable prices Advertising on Chinese social media and micro-blogging website Weibo has been popular Raw material and products are sourced locally. IKEA also built two factories in Shanghai to avoid high import taxes

Store Location
The suburbs, next to highways so that access by car is easy

l iu j i n / a f p / g e t t y i m a g es

Price
Low-cost

Promotion
IKEA catalogue is the main marketing tool

Logistics
Products are sourced and made in developing nations like China and Malaysia, and then shipped to Europe

lems for IKEA was that its prices, considered low in Europe and North America, were higher than the average in China. Prices of furniture made by local stores were lower as they had access to cheaper labour

ume sales in the country come from local sourcing. These local factories resolved the problem of high import taxes in China. The company also started performing local quality inspections closer to manufacturing to

case study IKEA

save on repair costs. Since 2000, IKEA has cut its prices by more than 60 per cent. For instance, the price of its Lack table has dropped to 39 yuan (less than five euros at current exchange rates) from 120 yuan when IKEA first came to the Chinese market. The company plans to reduce prices further, helped by mass production and trimming supply chain costs. High prices were one of the biggest barriers in China for people to purchase IKEA products. IKEAs global branding that promises low prices did not work in China also because western products are seen as aspirational in Asian markets. In this regard, IKEAs low-price strategy seemed to create confusion among Chinese consumers. The company realised this and

The main problem for IKEA was that its prices, considered low in Europe and the US, were higher than the average in China
started targeting the young middleclass population. This category of customers has relatively higher incomes, is better educated and is more aware of western styles.

Targeting this segment helped IKEA project itself as an aspirational western brand. This was a massive change in strategy, as IKEA was targeting the mass market in other parts of the world. IKEA also had to tweak its marketing strategy. In most markets, the company uses its product catalogue as a major marketing tool. In China, however, the catalogue provided opportunities for competitors to imitate the companys products. Indeed, local competitors copied IKEAs designs and then offered similar products at lower prices. IKEA decided not to react, as it realised Chinese laws were not strong enough to deter such activities. Instead, the company is using Chinese social media and microblogging website Weibo to target the

urban youth. IKEA also adjusted its store location strategy. In Europe and the US, where most customers use personal vehicles, IKEA stores are usually located in the suburbs. In China, however, most customers use public transportation. So the company set up its outlets on the outskirts of cities which are connected by rail and metro networks. The China expansion came at a cost. Since 1999, IKEA has been working on becoming more ecofriendly. It has been charging for plastic bags, asking suppliers for green products, and increasing the use of renewable energy in its stores. All this proved difficult to implement in China. Price-sensitive Chinese consumers seem to be annoyed when asked to pay extra for plastic

Chinese competitors copied IKEAs designs from its catalogue and then offered similar products at lower prices
bags and they did not want to bring their own shopping bags. Also, a majority of suppliers in China did not have the necessary technologies to provide green products that met

IKEAs standards. Helping them adopt new technologies meant higher cost, which would hurt business. IKEA decided to stick with low prices to remain in business. As IKEA prepares to enter India, its China experiences will come in handy. It understood that in emerging markets, global brands may not replicate their success using a lowprice strategy. There always will be local manufacturers who will have a lower cost structure. It is more important what customers think about the company rather than the other way around. IKEA wanted to be known as a lowprice provider of durable furniture, while Chinese consumers looked at IKEA as an aspirational brand. It is likely that Indian consumers will also look at IKEA in a similar way.

ikeas India rollout will be slow

FDI in retail in India has been a non-starter, hopelessly mired in special-interest politics
Professor of Marketing and Director of the Aditya Birla India Centre at London Business School he success of IKEA in China is an interesting adaptation example by a global retailer. Yet, it may not be much of a predictor of IKEAs fortunes in India. This may have less to do with IKEA and more to do with the economic policies of India. A well-designed foreign direct investment (FDI) policy should have resulted in a rush of much-needed foreign investment to India, upgrading of the supply chain, modernisation of the retail sector, as well as more choices for consumers with lower prices. Instead, FDI in retail, like in higher education, has been a non-starter, hopelessly mired in special-interest politics. The rules are so onerous that a mass retailer such as IKEA will find it hard to meet them without penalising customers with higher prices and lower choice. Also, it will be difficult for IKEA to find the type of location (size, off a

the main challenge is to adapt

here is no formula for success that fits all marketing strategies when a global brand decides to try a new market, except perhaps unconditional acceptance and responsiveness to changes. The greatest challenge is to adapt constantly. Its essential for successful marketing campaigns to take into consideration the local approach versus the global/regional desire for standardisation. A onesize-fits-all approach is a rare reality. A consistent global brand promise is a desirable asset but what makes a real difference is to be brave and ready to change the target audience and build a differentiating promise. IKEA made all necessary adjustments to make sure there was no mismatch in its growth ambitions and brand promise. Becoming an aspirational brand which is blogging with the Chinese middle-class youth

Prof Nirmalya Kumar,

highway, with great links to a major metropolis) that is crucial to the success of its business model. This will mean the first store will take much longer to open than Indians expect and the rollout will be painfully slow. Fortunately, as a privately held company with a longterm orientation, IKEA will persevere where more impatient publicly held firms may have given up. For India to kick its economy back to the growth rates necessary for meeting the aspirations of its citizens, we need to roll out the red carpet for foreign investors instead of red tape. Competition law and trade policies are supposed to ensure that a free competitive marketplace exists, with easy entry and exit, not protect existing competitors from new entrants. Capitalism without failure is like religion without sin.

is an unexpected twist in its brand proposition. IKEA demonstrated courage to get the most relevant changes. By courage I mean all big corporations are ready to shift production, work with local sources, overcome legal requirements but not too many of them are ready to adapt a brand proposition that suits the level of development the market and consumer perception require. IKEA is a strong brand that understands that growing globally requires sacrifices and innovation from global teams, and they are ready to listen, respect and learn from the local environment. The European headquarters excitement to enter new markets with proven best practices is something of the past, proving that the real shift in the global mindset is to recognise that local versus global can bring optimum results.

Its essential for successful marketing campaigns to take into consideration the local approach
Regional Marketing Manager, FWS/OEM SHELL

Yelena Zubareva,

104 Business today July 21 2013

July 21 2013 Business today 11

case study IKEA

The company also learnt that emerging economies are not ready for environment-friendly practices, especially if they result in higher prices. IKEA, famous for its flat-pack furniture which consumers have to assemble themselves, realised that understanding the local culture is important Chinese people hate the do-it-yourself concept and Indians likely do so even more. IKEA may face some Indiaspecific challenges such as varying laws in different states ruled by different political parties. This could make its operations, especially distribution and logistics, a bit challenging. IKEA already has had to wait a long time to get permission to open stores in India. The delay in policy-making at the state level could be even longer.

In India, IKEA may face some country-specific challenges such as varying laws in different states
Indian customer preferences and economic environment are similar to the Chinese market. IKEA will likely have hopes of attracting Indias urban middle-class buyers

who are keen on decorating their homes with stylish international brands. The company has learnt that doing business in emerging markets is a different ball game for a multinational company. IKEA did well to adapt in China, although it took numerous changes to its strategies and more than 12 years for the company to become profitable in the Asian nation. ~ (This case study is from the Aditya Birla India Centre of London Business School.) What can we learn from IKEAs brand adaptation in China? Post your comments at www.businesstoday.in/ casestudy-ikea. The best response will win a copy of India Inside by Nirmalya Kumar and Phanish Puranam. Previous case studies are at 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 becoming 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. McDonalds followed this adaptive strategy in India when it launched McAloo tikki burger to attract customers. Since then McDonalds 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