BSTR/445

IBS Center for Management Research

Teaching Note:

Business Model and Competitive Strategy of IKEA in India

This teaching note was written by Debapratim Purkayastha, IBS Hyderabad.

 2015, IBS Center for Management Research. All rights reserved.

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 BSTR/445

Business Model and Competitive Strategy of IKEA in

India
TEACHING NOTE
ABSTRACT

The Netherlands-based Swedish company IKEA, was the largest furniture retailer in the world
with its presence in 44 countries around the globe – in countries like the US, the UK, Russia, the
Euro region, Japan, China, Australia, etc. However, it did not enter the Indian market till 2013,
though the company had had its presence in the country since the 1980s as a sourcing destination
for its global stores. After years of lobbying, and negotiating with and convincing the Indian
politicos and bureaucrats, on May 2, 2013, IKEA’s €1.5 billion investment proposal to set up its
stores in India was finally accepted by the local government. The company also had to tweak its
global store model to fit in with the Indian FDI regulations and sourcing requirements and Indian
consumer preferences. However, there were still numerous obstacles in its path in the form of real
estate locations and cost, Indian consumer requirements and mentality, and competition from
existing Indian furniture retail chains. The question was could IKEA tweak its globally successful
business model to suit the requirements of India without breaking the model?

TEACHING OBJECTIVES AND TARGET AUDIENCE

This case study will help the students to:

1. Understand issues and challenges related to IKEA’s business model and its competitive
strategy
2. Understand issues and challenges related to IKEA’s globalization and strategy in a key
emerging market.
3. Understand issues related to IKEA’s market entry strategy and expansion in India
4. Identify challenges that IKEA could face in the Indian market and explore ways in which these
could be overcome.
This case is meant for MBA students as a part of the Strategic Management/ International
Management /Competitive Strategy course.

TEACHING APPROACH AND STRATEGY

This case study can be used to explain the changing dynamics of the Indian furniture retail market
in detail. It can be used to deliver the concepts of market entry strategies and the importance of
pricing and localization and personalization to gain customers. At the same time, it can also be
used to demonstrate the key aspects of IKEA’s business model – factors that provide it with a
competitive advantage. The instructor can then challenge the students to come up with a model for
IKEA in India and how it could compete in this key emerging market.

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 Business Model and Competitive Strategy of IKEA in India

QUESTIONS FOR DISCUSSION

1. Describe the key elements of IKEA’s globally successful business model. What are the
sources of IKEA’s competitive advantage?
2. Analyze the reasons for IKEA’s delayed entry into the Indian market.
3. Discuss the market entry strategy of IKEA for the Indian market. What are the advantages and
disadvantages of adopting the wholly-owned subsidiary route in entering the market?
4. Describe the bureaucratic and political challenges faced by IKEA in gaining approval to enter
India. How did the company overcome these?
5. Discuss the challenges that IKEA could face down the line in establishing its stores in the
Indian market. What steps should IKEA take to succeed in the Indian furniture market?

ANALYSIS

1. Describe the key elements of IKEA’s globally successful business model. What are the sources
of IKEA’s competitive advantage?
IKEA has relied on an innovative business model to disrupt the competitive furniture business.
This business model is in total alignment with its strategy (See Figure I for IKEA’s strategy).
Figure I

IKEA’s Strategy

Arenas
• Inexpensive contemporary furniture
• Young white-collar customers
• Worldwide

Staging Vehicles
• Rapid international • Organic
expansion, by region expansion
• Early footholds in each • Wholly owned-
country, fill in later stores

Economic Logic Differentiators

• Economies of scale (global, • Very reliable quality
regional, and individual-store • Low price
scale) • Fun, non-threatening
• Efficiencies from replication shopping experience
• Instant fulfillment

Source: Donald C. Hambrick and James W. Fredrickson, “Are You Sure You Have a Strategy?” Academy of
Management Executive, Vol.19, No.4, 2005.
Over the past decades, IKEA has tasted remarkable success with its strategy which is
explained with the help of Hambrick and Fredrickson’s strategy diamond. In the case of IKEA
we see that all the five elements of strategy as shown in the Figure I, complements and
reinforces each other. The fundamental logic of IKEA’s business model is creating value with
all the activities it was engaged in as shown above. The strategic ‘fit’ is a source of
competitive advantage for IKEA as it is hard to replicate by competitors. The key aspects of
IKEA’s strategy are:

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 Business Model and Competitive Strategy of IKEA in India

 Wide range of contemporary furnitures and furnishings (Scandinavian style)

 Inexpensive furniture targeting mostly young and white-collar customers.
 Scope of business is global – markets with characteristics that would supports IKEA’s
unique business model
 Maintaining control over product design – core competency in designing.
 Manufacturing is outsourced – relies on long term and globally dispersed suppliers for
efficient manufacturing.
 Relies on organic growth with wholly owned subsidiaries – provinding IKEA with high
level of control over execution of its strategy in local markets.
 Differentiates based on a hybrid competitive strategy based on low cost (drives costs down
through negotiations with suppliers, DIY model, easy-to-manufacture product designs, no
transportation costs, etc.) and differntiators that the customers have a willingness to pay
for (customer experience, theme-park like format, gourmet food, children’s pay area,
marketing, instant fulfillment, etc.).
 Rapid international expansion, but one region at a time.
 Leverages economies of scale and efficiencies of replication – more of standardization
(around 70%), with stong hold over suppliers because of volume of purchase.
IKEA’s competitive strategy was a hybrid one, with on one hand driving down the costs, while
on the other hand providing certain things that are way above what customers come to expect
from a retailer. A hybrid strategy seeks simultaneously to achieve differentiation and a price
lower than that of competitors. Here the success of the strategy depends on the ability of the
firm to deliver enhanced benefits to the customer at low prices, while earning sufficient
margins for reinvestment to maintain and develop the bases of differentiation.
IKEA realized that it could achieve a high standard of product, but at a low cost, while
concentrating on building differntiation on the basis of its marketing, range, logisticss and
store operations. Also low customer expectations on service levels allowed IKEA to cut costs
as customers were prepared to transport and build its products (DIY). Clearly, its products
were not the best in terms of quality or durability, but it is sufficent to attract its target
customers. But at the same time IKEA invests a higher amount in its store ambience, gourmet
food, child’s pay area, and in strong marketing. Having a successful hybrid strategy can enable
a company to create a very loyal customer base (even cult-like following) as this involves
knowing the strategic customer very well and making all efforts to satisfy their needs. It can
also help a company in entering a new market (even an established one will well-placed
incumbents) and quickly build up a customer base in that market.
IKEA’s strategy had worked well for the global retailer. The company’s operations in in 44
countries generated sales of €27.628 billion in 2012 and operating and net incomes of €3.482
billion and €3.202 billion respectively. We can see from Case Exhibit II, the company was
able to show growth on nearly all key metrics – revenue, operating income and net income.
2. Analyze the reasons for IKEA’s delayed entry into the Indian market.
IKEA is considered to be a poster child of globalization. The Netherlands-based Swedish
company, was the largest furniture retailer in the world with a presence in 44 countries around
the globe – in countries like the US, the UK, Russia, the EU region, Japan, China, Australia,
etc. However, it did not enter into the Indian market till 2013, though the company had had a
presence in the country since the 1980s as a sourcing destination for its global stores. It had
even opened its regional procurement office in Gurgaon, India, in 2007. So, India was already
a key sourcing destination for IKEA, but it stopped short of entering the market with its store
format.

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There are various factors that a company evaluate to understand the attractiveness of a market.
The process of market entry requires a firm to select attractive and profitable national markets,
and decide how to enter them. The selection of national markets entails analyzing the macro
level factors and in terms of competitive and market conditions prevalent in the market. A
PESTEL analysis of the country market can be useful here, before the industry and market-
specific conditions are evaluated.
Some factors that require particular attention in gauging the attractiveness of a country market are:
 Macro-economic conditions (GDP, disposable income, stability of the country’s currency,
etc.)
 The political environment can create significant opportunities as well as hurdles.
 The infrastructure of the host country (transport and communication, local resources, tariff
and non-tariff barriers to trade, etc.)
 Cultural norms and social structures – how similar or dissimilar they are to the other
existing markets.
 The extent of political and legal risks that a firm might fact when doing business in the
country (sovereign risks, corruption, IPR regime, international risks, security risks, etc.)
Macro-environment refers to the conditions that exist in the whole economy rather than in a
particular region. There are many factors in the macro-environment that impact a business.
Examples of the factors that constitute the macro-environment include changes in inflation,
gross domestic product (GDP), cultural beliefs, fiscal and monetary policies, employment,
technological changes, etc. The macro-environment surrounding any business will affect its
functioning and impact the decisions of its managers. Managers need to analyze and monitor
these macro-environmental factors in order to successfully run their businesses. Broadly, there
are six macro-environmental factors which a firm must monitor, viz. demographic, economic,
socio-cultural, natural, technological, and political-legal. Managers should also monitor how
these factors interact with each other and influence the functioning of a business.
Companies which are planning to enter foreign markets need to pay more attention to
understanding and monitoring two crucial factors of the macro-environment: political-legal
and cultural. The political-legal environment is crucial for the functioning of any business
organization. It comprises political parties, laws, government agencies, lobbying groups,
government departments, and the judiciary. Cultural environment refers to the institutions and
other factors which influence a society’s preferences, beliefs, values, and behaviors.
If one does a PESTEL analysis, one can understand why IKEA did not venture into India even
though it had entered other emerging markets like China. The market in India was highly-
fragmented, price-sensitive, and the company also had to encounter many political and
regulatory hurdles. The taste and preferences of the consumers were also markedly different and
IKEA was not very familiar with the consumer characteristics. Moreover, the company might
not have been convinced that its internal strengths could be leveraged in a country like India.
However, IKEA was closely studying the market and it was not for long that IKEA could
ignore the Indian market with its huge population and growing middle class. The Indian
furniture and furnishings itself was worth around Rs. 925 billion in 2013. Globally, the
company had doubled its sales to €27.6 billion in the past decade and further planned to double
them again by 2020 and to open 20-25 stores a year from 2015. Success in a big market like
India was crucial to IKEA achieving this goal.
In the first decade of the new millennium, IKEA started making efforts to enter the market but
its attempts were thwarted by India’s stringent Foreign Direct Investment (FDI) regulations. It
again applied for permission for entry in June 2012, after India had made some changes in its

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FDI rules. However, IKEA had to wait another year, hitting many roadblocks on the way,
before it was able to obtain the Indian government’s approval to establish its stores. The
company also had negotiate hard with the regulators and even make some adjustments in its
global store model to fit the Indian FDI and sourcing outlines and Indian consumer
preferences.
3. Discuss the market entry strategy of IKEA for the Indian market. What are the advantages and
disadvantages of adopting the wholly-owned subsidiary route in entering the market?
Once a particular national market has been selected for entry, a firm need to choose, which all
value-creating activities are to be located in that market. India already served IKEA as a low-
cost sourcing destination since the 1980s. Every year, the company sourced around US$600
million worth of goods (textiles, rugs, lighting, ceramics, and carpets) from 70 suppliers and
1,450 sub-suppliers in India. In addition to this, in 2012, IKEA committed to invest €1,500
million in the country to set up its store business. In the first phase, the company planned to
invest €600 million in opening 10 stores by 2023, followed by the remaining €900 million for
setting up 15 more stores in the next phase. IKEA’s planned investment was till then the
largest by a foreign retailer in India.
A firm can expand into international markets through different modes depending upon several
factors like the needs of the firm, its capabilities, and its past experience. Entry modes differ in
the degree of resource commitment to a particular market and the extent to which an
organization is operationally involved in a particular location. The key entry modes are:
exporting, contractual arrangement through licensing and franchising, joint ventures, strategic
alliances and foreign direct investment (FDI). FDI may involve establishing ‘greenfield’
investments or acquisitions. IKEA’s strategy was based on organic growth, so it opted for the
FDI route by setting up a wholly-owned subsidiary. The advantages and disadvantages of
adopting such an entry mode are:

Advantage Disadvantage
Full control of resources and capabilities. Substantial investment in and commitment to host
country leading to economic and financial
exposure.
Facilitates integration and coordination of Going it alone in a host market whose cultural
activities across national boundaries. norms and social structures are very different from
the existing markets may be fraught with risks.
Greenfield investments allow development Greenfield entry time-consuming and less
of state of the art facilities and can attract predictable in terms of cost.
financial support (or goodwill) from the
host government.
Adapted from • Johnson, G., Whittington, R., Angwin, D., Regner, P., Scholes, K., & Pyle, S. (2013).
Exploring strategy: text and cases. Pearson.
IKEA had significant experience in internationalization so it preferred adopting the wholly
owned-subsidiary route when the opportunity was presented to it as the Indian government
allowed 100% FDI in single brand retail in 2012. For some time in the previous years the
retailer also mulled some strategic alliance as an entry mode into India. Entering into
partnerships with local firms can help a firm in dealing with local governments and
customizing its products and services to suit local tastes and preferences. However, IKEA had
enough confidence on its strategy and capabilities to opt for its preferred mode of entry
through direct investment by setting up its own subsidiary in India.

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4. Describe the bureaucratic and political challenges faced by IKEA in gaining approval to enter
India. How did the company overcome these?
IKEA faced significant bureaucratic and political challenges in gaining approval to enter India.
In the initial phase its efforts to enter the market were frustrated by the country’s FDI norms.
Till 2011, FDI in multi-brand retail was not allowed by the Indian government and FDI in
single-brand retail was permitted only up to 51%. In November 2011, the FDI reforms were
announced but due to opposition from different political parties and activists, they were kept
on hold. FDI in retail was a political issue in India with some stakeholders who were opposed
to it. It was only after India allowed 100% FDI in single brand retail in January 2012 that
IKEA could think of entering India through its preferred mode of entry – through setting up a
wholly owned subsidiary.
But the struggle was not over for IKEA as the process was marred by bureaucratic delays and
it had to comply with various stringent regulations, and get approvals from various
government bodies in order to start operations in India. Such bureaucratic delays and red tape
are the hazards of operating in emerging markets in India where markets are not sufficiently
evolved. Some of these requirements put significant pressure on IKEA as these ran contrary to
IKEA’s strategy and business model.
 Sourcing norm – The requirement of 30% sourcing of goods from India’s micro, small,
and medium enterprises (MSMEs).
 Foreign Investment Promotion Board (FIPB) while approving IKEA’s proposal to start its
operations in India imposed the following conditions – IKEA should not operate food and
beverage outlets within the store; it should not sell 18 categories of items (of the 30 initially
applied categories) like gift items, home and office products, apparel, leather products,
fabrics, textile goods, books, toys, travel and lifestyle items, and consumer electronics; it
should not sell any products that it did not brand, including secondhand furniture.
 The general perception in certain circles that its entry would put millions of small-time
shops out of business.
The management of IKEA engaged in dialogue with the stakeholders and also lobbied the
government to address these concerns.
 IKEA expressed its concerns with the mandatory 30% sourcing of its goods from Indian
MSMEs. It told the government that it was already sourcing a huge amount of its products
from India (US$600 million per annum, by engaging with 70 suppliers and 1450 sub-
suppliers) but the mandatory sourcing clause put some burden on the company and its
business model. It sought a 10-year window (instead of one year) to comply with the
sourcing rules. IKEA also expressed concerns that if it procured from MSMEs (firms with
a total investment less than US$ 1 million), they would soon grow and become large
setups. Then the company would have to find other MSMEs, which would affect its
product quality and supply chain setup. The negotiations led to the Indian government
finally modifying the sourcing clause. It changed ‘mandatory sourcing from MSMEs’ to
‘preferably from MSMEs’ and said that foreign firms expecting a relaxation in the 30%
procurement norms would have to set up a manufacturing facility in India. The
government, however, insisted that IKEA could not use its global procurement of products
to satisfy the Indian demand of mandatory sourcing (30%) from the country. India also
provided IKEA a five-year window (from the time of the company’s initial launch in the
country) to fully comply with the sourcing requirements. IKEA also gave the assurance
that the old furniture collected from Indian customers in exchange for new ones would not
be re-sold in the market but donated to needy families or third party small businesses
through charitable organizations. While India had been IKEA’s sourcing destination for
textiles and carpets for a long time, the retailer expressed its interest in further tying up

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with Indian suppliers in the plastics, steel, lighting and natural fiber categories as well. It
invited all its suppliers to its Gurgaon office and discussed its plans for the future and how
it could help the supplier in its efforts to double its sourcing from Indian suppliers.
 Regarding the issue of the Indian regulator refusing IKEA permission to sell 18 categories
of products in its stores in India, the retailer argued that this aspect was crucial to IKEA’s
business model. It argued that its model was the same in 44 countries and it was not
demanding anything extra from India. Replying to the government’s concerns about in-
house cafés, the company said that as the stores would be located on the outskirts of the
city there would not be any displacement of small food retailers. The company wrote to
the Department of Industrial Policy and Promotion (DIPP) stating that to keep the ‘IKEA
experience’ intact, the company must be allowed to operate its global model. On January
22, 2013, FIPB cleared IKEA’s business proposal and permitted it to sell non-furniture
items and run cafés in India with the caveat that the food and beverages would be sold at
IKEA’s in-store restaurants/cafés only. Other conditions included the restriction of e-
commerce sales and used furniture sales.
 Regarding concerns about IKEA’s entry into India, the company highlighted how it was
already sourcing a huge amount of its products from India (US$600 million per annum, by
engaging with 70 suppliers and 1450 sub-suppliers). IKEA highlighted the total
investment (€ 1.5 billion) that the retailer was planning for India and how these will lead
to new employment. It said that IKEA’s presence in India will help improve availability of
high quality, low-price products, increase sourcing of goods from India and increase the
competitiveness of Indian enterprise through access to global designs, technologies, skill
development, and global best practices. It also committed that it would continue to
increase its sourcing in India from both existing and new suppliers building on long-term
relations and shared values.
IKEA lobbied hard with the Indian politicos and bureaucrats to overcome the initial hurdles
and obtained permission to open its stores in the country with its global model intact. It had
some leverage with the government in the negotiation as the country’s GDP growth was
slowing (around 5.3% in 2012), and there was a widening trade gap with a current account
deficit of 4% of GDP, requiring international capital to overcome the gap. The Indian
government was already under pressure to implement economic reforms. India’s balance-of-
payments situation required reforms to attract FDI, and thus IKEA with its global stature and
promise of sizable financial commitment held some clout in the negotiations.
5. Discuss the challenges that IKEA could face down the line in establishing its stores in the
Indian market. What steps should IKEA take to succeed in the Indian furniture market?
With much of the political and regulatory hurdles behind it, IKEA was now faced with some
additional challenges going forward. Some of these challenges are related to the Indian market
which was much different from IKEA existing markets.
 India was home to rich traditional handicrafts and artistic work of wood. Indian art and
design had earned a worldwide reputation for themselves for their quality, exceptional
designs, and luxurious trends lent elegance to the Indian furniture segment. Will the flat-
bed designs of IKEA appeal to the customers?
 The market was also largely unorganized, with organized retail accounting for only about
4%. However, of late a number of retailers have come up intensifying the competition for
contemporary and imported furniture as can be seen from Exhibit V in the case. How does
IKEA face up to the competition with local rivals (some with deep pockets) who have
better understanding of the local market and customer preferences?
 A major challenge for the company in establishing its stores was the availability of retail
space and the associated cost. Real estate costs are highly prohibitive. Will it be able to get
this space at a good price in India? IKEA’s 2006 initiative of 100% renewable energy

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usage required its stores to be supplied with either wind power or energy from solar
panels. Its stores in Germany, France, Sweden, and at forty more places used either power
from their own wind turbines or from solar panels. The possibility of Indian real estate
developers meeting such stringent energy requirements was also doubtful.
 IKEA is known for its low prices, but will these prices be considered low by customers in
India, considering that the company was trying to attract the “real middle class” in the
country? Will the Indian customer be ready to go to the outskirts to buy their furniture?
Will the IKEA concept appeal to Indian customers?
 Apart from that, IKEA’s do-it-yourself (DIY) concept might be a hit globally, but people
in India preferred readymade furniture or getting it made by their carpenters. Moreover,
Indians expected shop assistants to guide them around the store and the lack of such staff
would come as a shock to them.
 The retailer is also not immune to further bureaucratic trouble as India is also known for
arbitrary decisions and inadequate enforcements of law. The bureaucracy is also marred by
corruption, while IKEA is committed to ethical practices with strict anti-corruption policy.
Juvencio Maeztu (IKEA’s Country Manager for India) had said that the retailer has understood
that the market is different and the customer’s tastes and preferences are significantly different,
and he said that IKEA was prepared to “slightly tweak” its model in India, keeping in mind the
Indian consumers and the dynamics of the Indian retail industry. IKEA’s success or failure
would depend on how this tweaking is done. India is fast emerging as a very attractive market
and IKEA may be tempted to make too many changes to capture the market. IKEA had always
maintained a high level of standardization of tis products and the IKEA concept. It is very
important that IKEA does not make too many changes that could lead to breakdown of its
business model in India.
We have seen that for IKEA, the fundamental logic of the business model is creating value
through economies of scale. All the activities the retailer engages in support the logic. Often
when we see firms getting into trouble it is because they are trying to mix different value
propositions together or the established business model gets surpassed by others with better
business models with superior value propositions. IKEA has a clear competitive strategy. The
hybrid strategy employed by it is dependent on the various activities it engages in to support
the strategy. We have seen how this ‘fit’ leads to the retailer gaining a competitive advantage.
Doing different activities to support different value propositions could also lead to IKEA being
‘stuck in the middle’ – a recipe for failure.
However, it is good to see that IKEA is not in a hurry to open its stores in India. It is prepared
to invest significant time and efforts into fine tuning the India strategy. It would not be until
2017 that the first store would be launched in India. As IKEA is a private company and due to
its unique structure (case Exhibit III) this is made possible. IKEA’s ownership structure stood
for independence, long-term approach, and continuity. IKEA’s representatives were visiting
Indian homes and interacting with the potential customers to understand them better.
Historically IKEA’s internationalization strategy in Scandinavian countries and the rest of
Europe has not paid significant attention to local tastes and preferences in the different
European countries. Only necessary changes were allowed, to keep costs under control and
IKEA’s low responsiveness to local needs strategy seems to work well in Europe and many
other countries. Subsequently, even in other markets like US, China and Japan the company
encountered some problems but was able to flourish without making any big change to its
business model. IKEA does not significantly change its corporate strategy and operations to
adapt to local markets unless there is a compelling reason for doing so. It is only with
organizational learning that IKEA brings about certain adaptions in its model in order to adjust
to local markets.

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Suggested Readings:
 Deresky, H. (2013), International Management: Managing Across Borders and Cultures, Text
and Cases (8th Edition), Pearson.
 Johnson, G., Whittington, R., Angwin, D., Regner, P., Scholes, K., & Pyle, S. (2013).
Exploring strategy: text and cases. Pearson.
 Hambrick, D. C., & Fredrickson, J. W. (2001). Are you sure you have a strategy?. The
Academy of Management Executive, 15(4), 48-59.
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June 2, 2013
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standard.com, June 11, 2013
3. Trupti Palhade, “Top 10 Home Furniture Brands in India,”
http://top10companiesinindia.com, May 27, 2013
4. Rasul Bailay and Chaitali Chakravarty, “IKEA ready to wait for years for perfect locations:
CEO,” http://articles.economictimes.indiatimes.com, May 16, 2013
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http://articles.economictimes.indiatimes.com, May 3, 2013
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2013
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19. Amol Sharma and Jens Hansegard, “IKEA Says It Is Ready To Give India a Try,”
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