SUBMITTED TO:

Prof. Ganesh N. Prabhu, New Product

Development-1, Term IV, 2016
roseketty tete
Group C1: Rose Ketty Tete (1511046) |
Prem Prakash (1511111) | Himani Arora
(1511247) | Jyoti Prasad Doley (1511328)
BACKGROUND
IKEA is known worldwide as a low-cost, high quality - trendy furniture and home decoration.
IKEA opened its first full-scale store in China in 2003, and since then has not been able to
make profits. Problems like copying of designs, their perception of being low cost, inability to
own land and open large suburb stores, has led to a situation where IKEA cannot use its usual
strategies to repeat its success story in China. The strategies that IKEA should adopt to gain a
competitive advantage in a distinctive developing country and position itself in a way that
Chinese consumers understand their value proposition of low cost - DIY product is a big
concern for IKEA. IKEA is facing transformational hyper-competition in the Chinese market
and therefore, initial profits when the product was launched was low (Refer to exhibit 1 for
competitor)
ABSTRACT
To be successful in China, IKEA should modify its existing strategy of low-cost, high quality
as it operates in the transformational hypercompetitive Chinese furniture industry (Refer to
exhibit 2 for industry analysis) Due to the threat from existing local furniture player, IKEA
should leverage its foreign identity to cater to aspirational customers. It should not market itself
as low priced brand to attract these customers. Further, it can cater to mid-range income players
by reducing the price without marketing itself as low price brand. Currently, there is a relatively
small percentage of consumers who relate to simplistic and trendy designs of IKEA. As the
Chinese market it transforming quickly due to factors like globalization and opening up of their
economy, IKEA should continue to offer its unique design through DIY. Also, IKEA should
aim to become the market leader in interior decoration industry which is still nascent in China
given that it has first mover advantage. By adapting itself to the Chinese market, IKEA can
repeat its success in China.

ISSUES & RECOMMENDATION

Target Segment
Issue : IKEA is targeting only a small fraction of the customer segment who are high end and
hence, missing out on potential consumers
Recommendation: IKEA should
target the mid-income target
income group along with the
current high-income group who
are inclined to like trendy and
simplistic designs of IKEA with
the age of 28- 35 years of age.

Rationale: - Currently, IKEA is

focusing only high-end customers
with a monthly income of RMB
6000. Figure 1: The potential vs. existing target customer
segment for IKEA1

1
The average income (GPD per capita) is given to be $US1000 which is equivalent to RMB 8223 per year or
RMB 685. The conversion rate of 8.22 RMB per USD is used as given in case (page 11)
But this constituted an only small percentage of the total population (2.7% corresponding RMB
5000 to RMB 8000 monthly income). Further, the actual customers who were purchasing from
IKEA store were with monthly income below RMB 3000.
Further, one of the core aspects of Ikea's furniture is its simplicity and trendy designs. It aligns
with the taste of segment of 28-35 years customers were more inclined towards western
concepts as they work with foreign invested enterprises and private firms. Ikea should continue
to hold on to this value proposition, as more and more Chinese are expected to accept and
appreciate these designs going forward with globalization and opening up of the Chinese
economy.
2. Market Positioning
Issue: There is a disconnect for IKEA between market-perceived quality with respect to the
market perceived price.
Recommendation: IKEA
should position itself as a
premium foreign brand with
high-quality offerings to
aspirational consumers and
affordable brand through
concepts like Do-it-yourself
(DIY) for mid-income
consumers without explicitly
branding itself as "low price".
Rationale: - There is a clear
disconnect between market
proposition of IKEA and what
customers expectation from the
brand of IKEA. Currently,
IKEA's unique proposition is Figure 2: - Difference in the perception of the IKEA vs.
low price, high-quality products potential customer segment of high and mid-range income groups
furniture product.

Such a positioning is misaligned for both its customer segment. For high-end customers, the
"low price" value proposition of IKEA dissuade them as they equate high price with high
quality. Further, being a foreign brand, they aspire to purchase it for brand image and not low
price. Secondly, for the middle-income customer, the "low price" of IKEA is not low enough,
and the products of IKEA stay unaffordable to them. They can purchase the same product from
the local manufacturer. Thus 70% of these people prefer local brands. So, with its existing price
IKEA does not have a value-gap advantage compared to local competitors.
3. Pricing
Issue: - IKEA's product are not price competitive compared to local Chinese furniture
players

Recommendation: IKEA
should continue its effort to
reduce its price by achieving
economies of scale within
China (through expansion)
and reduce importing of
goods from outside.
Rationale: IKEA enjoy a
cost advantage over
competitors in western
countries. The cost advantage
come due to sourcing from
developing countries. This
cost advantage is lost in
developing countries. Figure 3 :- Cost comparison for IKEA with respect to competition
in China and West
Especially in China, local players well selling the same quality product at a lower cost than
IKEA. The reason behind is that they dont have to bear a design cost. Since China didnt have
IP laws, local players simply copy the design from international players. Further, local players
were leveraging the local knowledge to lower their cost. They were providing transportation
and assembly services despite low pricing of the products. Due to this IKEA was at
disadvantage in China
Since China was a developing country, the per capita income is much lower than the western
countries. So, the majority of Chinese people viewed IKEA as a highly priced product. Due to
this limitation, IKEA was able to bring only the mid-range product to China thus limiting
variation in product availability in the stores. Moreover, IKEA had to lower the price of the
product which reduced the profit margin.

4. Copy of Design of IKEA by local players

Issue: - IKEAs designs are copied by local players

Recommendation: IKEA shouldn't stop promotion through the catalogue. But they should
change it more frequently. IKEA can also show complete decorated room instead of individual
items.
Rationale: Currently, IKEA is issuing one catalogue in one year. The catalogue is one of the
major ways of communication. But they must find a way to do away with a catalogue in future
to prevent copying designs. Changing catalogue, i.e., designs frequently will give less lead time
to local players to copy. Due to its large global presence changing design frequently shouldnt
be a problem for IKEA. Showing complete decorated rooms will increase complexity in
copying as local players dont provide complete decoration solution and compatible items are
available only in IKEA store.
5. Do-It-Yourself Value Gap
Issue: - In China, people prefer assembled product and home delivery services.
Recommendation: Give people the option to choose between do-it-yourself or avail the
assembly service and delivery for an additional fee.
Rationale: IKEA shouldnt do away it DIY in China because their marketing campaign is
already promoting DIY and people are accepting the concept to some extent. People who
purchase from local players are receiving assembled product at home. For people who are not
accepting DIY concept, there is a clear value-gap which IKEA is not catering. So IKEA should
provide assembly and home delivery services to fill this gap. Charging a fee or this service will
push more people to DIY. With easy access to public transport from IKEA store, more and
more people will shift to DIY.

Opportunities for future growth

1) Expansion: Currently, IKEA has its operation in three cities of Beijing, Shanghai and
Guangzhuao and they are considering expansion in 14 other cities in China. IKEA should
pursue their expansion strategy more aggressively due to three reasons. Firstly, due to the threat
from competition, both local players like Qumei group who already have 400 stores and foreign
players like OBI who plans to open 100 stores in China in next seven years. Such aggressive
expansion by competitors can hit IKEA and give them first mover advantage in the tier- 2
cities. Secondly, to stay price competitive with respect to local players, IKEA should scale up
its operation to achieve economies of scale within China. Lastly, IKEA should expand into tier
2 cities as it will now start catering to mid-range income group.
2) Interior decoration market in China: Chinese consumers lack knowledge of home interior
decoration. High-income consumers still prefer traditional expensive designs, whereas medium
or low income buy from local firms. There is a high potential in the Chinese furniture industry
for interior decoration, and IKEA should position itself as the one providing this option.
IKEA is introducing the trendy interior decoration style to the Chinese customers with its
various products offering new designs and more options, by creating primary demand for
interior decoration. Since they have an image of being a foreign brand, their products are also
looked as trendy. Also, their stores which are smaller in China which are in accordance with
the size of a typical Chinese apartment, it is easier for consumers to understand the interior
decoration options. Its competitors in China only sell readymade furniture and no other
decoration items; they do not concentrate on design and manufacturing. Therefore IKEA has
an advantage over its competitors.
3) Cater to the traditional furnishing needs: Apart from introducing western styles to
Chinese people, IKEA should also modify some of its product to adopt Chinese culture and
needs. Chinese people have a strong tradition and cultural norms. Many of them even prefer
traditional furnishing. IKEA should provide sufficient options with products that fit into the
Chinese culture.
Exhibit 1: Competitor Analysis
IKEA Qumei Group B&Q OBI
No. of stores 3 400 18 14
Brand Image Expensive, High quality Modern DIY Modern DIY
trendy, foreign among upper- products, products,
middle income British German
consumers
Differentiation Design, Organizational Ready made Ready made
outsourced re-structuring products, no products, no
manufacturing, manufacturing manufacturing
involved in and designing and designing
supply chain,
design and
production
Future 10 stores in 6 - 80 stores by 100 stores by
expansions years 2008 2010

The Competition Analysis shows that IKEA competitors have greater customer touch points
with respect to IKEA, thus maybe allowing for a greater market reach. In light of low cost
offerings by competitors, the major customer segment might be concentrated among the local
Chinese players.

Exhibit 2: - Porter Five force analysis of Furniture Industry in China

Threat of New entrants: High
Low differentiation, less capital investment, unorganized industry
Bargaining Power of Buyers: High
Price sensitivity, many options in market with low differentiation among players
Bargaining Power of Suppliers: Low
Easily available cheap raw materials
Competitive Rivalry: High
Fragmented industry, prone to copying of design, less knowledge of interior
decoration
Threat of Substitutes: Low
No substitute of furniture