IKEA's India Expansion: Analyzing Entry Barriers and Strategies

This report analyzes the reasons for IKEA's delayed entry into the Indian market, highlighting corruption, land acquisition challenges, and governmental restrictions. It explores IKEA's choice of a wholly-owned subsidiary strategy, discussing its advantages and disadvantages. The report identifies key elements of IKEA's successful business model, including affordable prices, varied product offerings, and international expansion. Bureaucratic and cultural challenges faced by IKEA in India, such as mandatory local sourcing and the 'Do-it-yourself' concept, are also examined. Finally, the report identifies future challenges for IKEA in India, including investment returns, competition, and land acquisition, and suggests steps for success, such as competitive pricing and innovative designs. This document is available on Desklib, a platform providing study tools and resources for students.

Reasons for IKEA’s delayed entry in the market
IKEA is a Sweden based multinational company that excels in furniture, kitchen appliances and
other home accessories. Since 2008, it has been the world’s largest chain of furniture retailing. It
was discovered in 1943, by a 17 year old carpenter, which was later on felicitated by the Forbes
magazine as one of the ten richest people in the world. IKEA today has a global coverage,
spreading across 44 countries. India is the only country which has the widest middle class
population in the world. The survey clearly depicts that the investment strategies led down by
IKEA were approved by the Government after 2013 only. A clear look at the potential of
furniture market shows that it covers $20 billion annually. Data on PEST analysis shows the
prime reasons for IKEA’s delayed entry. The prime reason is corruption which is widespread in
India. IKEA functions on an anti-corruption policy. Therefore, whenever the company tried to
grab the market to achieve its sustainability, corruption, which is present in the political system,
proved to be a major hindrance. Another obstacle in the way, was the establishment of the stores
in the prime areas of metropolitan cities. The Indian currency was quite weak at that time,
moreover, the land acquisition was quite high, and whatever achievable, was in the outskirts of
the city. Purchasing a land and establishing business in prime locations was a major challenge, as
the company was running on an average investment policy. Apart from this, the government
gave approvals for 100% FDI, but could sale only 30% goods, that to from, small scale, and
average organizations.IKEA wanted to put its foot with 10 year stabilization in the market,
whereas it was permitted for a span of just 5 years (Gu, Rasch & Wenzel, 2015).

Wholly owned subsidiary market entry in India
Ikea entered the Indian market with an average investment. Initially, it didn’t have the capacity to come at
par or compete with existing companies of its field. Originally, Ikea was a very small company and used
to sell home goods in Sweden. The business expanded with the launching of retail stores in the beginning.
Wherever Ikea planned to set up a new business in a new country, it followed the wholly owned
subsidiary strategy. The reason behind incorporating this strategy by this company was that the company
wanted to make a smooth entry in the market without any hassles. If the parent company is well
established and known, and visible to the consumers, then launching of new products by its franchise
become easier and smoother. Also, the reliability rate and consumers’ chain become faster. In this
manner, Ikea was able to grab full attention of its customers and had a good command over operations.
Also, the unexpected obstacles in the market were resolved with immediate effect. Due to its major hold
over operations, Ikea grabbed the entire profit too. The smooth entry into the market also gave the
company a chance to monitor the best locations for establishing their new ventures. Today, the company
has a complete know how of its suppliers and strategies to expand its business anywhere and in any
country.
The advantages and disadvantages of adopting a wholly owned subsidiary are
1. As both the parent company and its subsidiary are working together under one roof, their
financial reports become simpler. A common report would the purpose. Also, revenue earner by
both the companies collectively can enhance their business, reducing costs of their products. On
the contrary, if the subsidiary company is not able to achieve good profits or fails to compete in
the market due to any reasons, its parent company’s financial growth shall be affected.
2. The management of the parent company can be used for technical expertise, solving issues,
working together etc. The disadvantage of working together is that for every new venture or new
challenge, the subsidiary company has to be dependent on the parent company (Fröding &
Lawrence, 2017).

Key elements of Ikea’s successful business model
Ikea, instead of making an individual identity of its own has always adopted the conventional method
of wholly owned subsidiary. The company’s business strategy evolved around the concept of
providing a varied range of products, at the most affordable prices, to as many people as possible. The
company aims at keeping highly integrated quality and design of its products with good values, which
are just incomparable. Through its business model, it excels in unique designing, packaging, and
distribution of its products. The integral elements to its business model are :-
 Affordable prices :- India, being a major sector of middle class people gets attracted towards
products which are durable at the minimum prices. Ikea follows this strategy to achieve its
objectives. The products offered by the company are quite reasonable and in accordance with
the latest technologies and innovations.
 Varied variety:- Ikea has a varied collection of 9500 products . It’s also updates its product
list by adding approx. 2500 products every year. The company is landing into the food
industry too.
 Expansion in the international market: - Ikea is posing a good competition to its
fellow competitors by expanding its business in the international market. Recently, they
have 340 stores in nearly 28 countries. The company is now planning to establish stores
in India and Serbia (Chollet, 2017).

Bureaucratic and cultural challenges faced
Entering the Indian market was a big challenge for Ikea. With a mandation to sell at least 30% products,
the company had to make its strategies more effective. Apart from this major challenge, there were other
obstacles too, which made difficult for the company to create a value of its own. Land acquisition being
high, the company couldn’t purchase land in the prime locations. As the business was limited, they also
faced problems running their food and beverage outlets and other home products. Ikea, always, believed
in Do-it-yourself concept, which was never accepted by the Indians in a positive manner. The company
also had to abide by the clauses set by the government, such as participative management, decision
making and long term plans. According to their DIY concept which was not running properly, they
entered the market , with low cost furniture, no shipping charges, and schemes like donation of old
furniture to the poor families.
Despite of Ikea’s approval, the company still faced challenges in the market. With massive hindrances
like non-availability of work places, the company had to adopt wholly owned subsidiary strategy. Other
reasons like corruption, shortages of funds also left the company in their struggling phase (Chen, Kor,
Mahoney & Tan, 2017).

Challenges to be faced by IKEA
Following are the challenges to be faced by the company in the near future:
1. Investment Returns- The Company is surveyed to be spending too much on establishing its
stores in India. For e.g., their Hyderabad store calls for an investment of 1.5 billion dollars ,
where the analysts fear, that it will take many years for the company to get returns on the
investments done. They have also invested a large amount of revenue in promoting their products
on the social media and BTL activities.
2. Cheaper products- Ikea is planning to launch minimum 1000 products under Rs.200/-.
Lowering down the price for their products will somewhere be a compromise with the quality as
well. It would take lot of years to get the desired results.
3. Land acquiring – Ikea would see a tough time searching for appropriate retail spaces.
4. Rivals online- With a wide range of furniture products available online on shopping sites, and
other big shots like urban ladder and pepper fry, Ikea will have to try hard to create its image
among tough competitors.
Steps to succeed in the furniture market
The following steps can help Ikea to succeed in the market. They are
1. The costing of the products should not be very expensive, but not too cheap also, keeping intact
the quality as well.
2. Introductory offers on stores should be encouraged.
3. The company should come up with innovative designs which are unique in its own way (Heaven,
2012).

References
Chen, P., Kor, Y., Mahoney, J., & Tan, D. (2017). Pre-Market Entry Experience and Post-Market
Entry Learning of the Board of Directors: Implications for Post-Entry
Performance. Strategic Entrepreneurship Journal, 11(4), 441-463. doi: 10.1002/sej.1251
Chollet, S. (2017). I for IKEA. Public, 28(56), 80-83. doi: 10.1386/public.28.56.80_7
Fröding, K., & Lawrence, G. (2017). Sustainability at IKEA. Linnaeus Eco-Tech, 67. doi:
10.15626/eco-tech.2010.008
Gu, Y., Rasch, A., & Wenzel, T. (2015). Price-sensitive demand and market entry. Papers In
Regional Science, 95(4), 865-875. doi: 10.1111/pirs.12165
Heaven, D. (2012). Robot learns using IKEA-style instructions. New Scientist, 216(2886), 24.
doi: 10.1016/s0262-4079(12)62630-x