Introduction and conclusion

Case3: IKEA Issue

Issues of IKEA: Ikea has an inflexible global model. When the company tried to change its model to fit in to the Indian operation, IKEA faced colossal issues. It was hard for the company to expand its business to Indian markets. This was because of the strict governmental regulation, huge consumer preference gaps, and high cost of retail space.

First obstacle of IKEA’s Indian operation was Indian Foreign Direct Investment regulations, and ultimately, the company invested 1.5 billion euro to have acceptance by the local government (Deresky P3-9). Before an amendment of the regulation, Indian FDI in single brand retail was permitted only up to 51percent. However, in 2012, India allowed 100 percent FDI in single brand retail on the condition that the retailer should mandatorily source 30 percent of their goods from India’s medium and small companies (Deresky P3-13). IKEA had to change its regulations, because the company former, Kamprad sticks to IKEA’s ownership structure that is stood for independence, long-term approach, and continuity, and it maintains to tight control over the operation by his family (Deresky P3-10). That is why IKEA could not give up for Indian FDI regulation, and needed to change it before enter the markets. However, if IKEA can make concession to its ownership structure and change is to fit Indian FDI, the company does not need to invest huge amount of money and enter the market more quickly. Moreover, the big company like IKEA was difficult to find local small vendors that accepted its huge sourcing and supply chains (Deresky P3-15). The government regulation was major issues to IKEA’s Indian operation, and the company needed some huge change from existing business structure and models.

Second, IKEA’s cultures are difficult to fit Indian’s consumer behavior. IKEA’s invention of flat packs and the do-it-yourself assembly concept cannot fit to Indian consumer preference (Deresky P3-11). IKEA succeed reducing cost, because the company’s product developers and designers worked directly with suppliers, and the concept of do- it-yourself concept (Deresky P3-12). On the other hand, people in India traditionally prefer to have customized and ready-made furniture by their carpenters, and they tend to show more affinity for unique woodwork and design than flat geometric furniture (Deresky P3-9). Therefore, Indian people do not have culture to build up their furniture by themselves, so it might hard to fit corporate successful business model does not work in Indian markets.

Third, IKEA’s one of the characteristics of huge store concept was difficult to fit in India due to retail space and its cost. IKEA stores were unlikely located in the suburban area of big cities and its largest store around the world had an area of 606,000 square feet (Deresky P3-17.18). However, in India, the cost of real estate is expensive, and it is difficult to establish its large store in those areas (Deresky P3-18). Also, IKEA required land acquisitions through the local government and individual owners to obtain large chunk of lands (Deresky P3-17). Moreover, Indian’s low levels of car ownership are difficult to transport its products, so the company needs to open stores in urban area. However, it would increase set-up costs, and harder to land acquisitions (Deresky P3-18). Due to those facts, IKEA’s Indian operation has issues to establish the traditional store model of IKEA, and the company should change the styles to fit Indian market.

Solution:

Ikea, the Swedish furniture retailing giant store will open its first store in India at Hyderabad in the second half of 2017. However, it is still looking for more sites in Delhi-NCR, Mumbai and Bengaluru. The company received government approval in 2013 for its Rs 10,500 large integer retail stores under 100 per cent FDI, plans to open 25 stores by 2025 in nine Indian cities. (India, P. T. )

"We will open our first store in Hyderabad in later half of 2017. Digging for construction of our first store in India started this week," IKEA Asia Pacific Retail President Mikael Palmquist told PTI. (India, P. T. ) IKEA's first store in Hyderabad will be a massive 4 lakh square feet in size and will include all features of a the global IKEA store. This includes restaurants and play and development area.

IKEA expect the store to be "the most visited store in the world". (India, P. T. ) To prepare for this they have planned to make bigger restaurants and more seating capacity. The plan for IKEA is to after Hyderabad they are planning on open more stores in Delhi, Mumbai and Bangalore. IKEA would like to open more than one stores in locations where their stores come up.

To suit India and the new market, IKEA is approaching the new market with showing its products from its global portfolio. This is based on the taste and requirements of the regions where its stores are located. IKEA has been in for example China for 15 years now with 3 stores. However, they are hoping that with the new approach and experience from China the stores in India will be more successful. The goal is that within five years, they should have capability to open three stores a year to hit the 25 stores they are aiming for.

IKEA knows that they need time to build a sustainable and long-term sourcing solutions to source raw material, find local entrepreneurs and to create industrial set ups. They need that time to become successful. The main challenges in meeting sourcing norms is availability of raw material and identifying right entrepreneurs they can work with.

Right now, IKEA sources products worth up to €300 million for its global operations from India.

References

India, P. T. (2016, March 06). IKEA to open 1st India store at Hyderabad in 2017. Retrieved March 06, 2017, from http://www.business-standard.com/article/pti-stories/ikea-to-open- 1st-india-store-at-hyderabad-in-2017-116030600115_1.html