Ikea Strategy in Egypt

Master of Business Administration IKEA Company Term Project STRA 703- Strategic Management Presented to Prof. Dr. Thomas Diefenbach by Merham Yousri , Mona Mansour And Passant Fouda Table of Contents 1. Introduction about IKEA4 1. 1. How the concept IKEA Began5 1. 2. IKEA concept, Mission and Vision6 1. 3. The main reason behind IKEA6 2. The Main Strategic Problem in IKEA7 3. PESTAL Analysis of the Macro- Environment7 3. 1. Political and legal Side in Egypt7 3. 2. Egyptian Economy9 3. 3. Egyptian Socio-Cultural environment10 4. Porter’s five forces Model11 5.

IKEA Resources, Competences and capabilities11 5. 1. IKEA Resources11 5. 1. 1. Financial resources12 5. 1. 2. Physical resources13 5. 2. IKEA Competences and capabilities14 6. SWOT Analysis15 6. 1. The Following Strategies would be great for IKEA:16 6. 1. 1. SO strategies:16 6. 1. 2. WO Strategies:17 6. 1. 3. ST strategies:17 6. 1. 4. WT Strategies:17 7. IKEA’s Current Strategic Position19 7. 1. Competitive Advantage19 7. 1. 1. Cost Leadership19 7. 1. 2. Product Differentiation19 7. 2. Bouman’s Strategy20 7. 3. Ansoff’s Product/ Market-Matrix20 8. Strategic Options21 8. 1.

To Target new segments for example; Resorts and hotels not only good Standards people and expatriates. 21 8. 2. IKEA should perform detailed Market research and studies of individual market tastes and get a feel for its Unique Customer. 21 9. Recommendations21 1. Introduction about IKEA What would be considered a great idea in the era of furniture? A dream of many customer would be high quality products and low of prices for these product because in the old days, you either got high quality and paid its share or went for cost but suffered low quality. Following the idea of his own Smaland province, Ingvar Kamprad invented the IKEA concept.

Why not make the most out of limited resources? That is what Ingvar decided to do. By following in the footsteps of his fellow Smalandians, he decided to work hard, live well and make the most out of limited resources. In 1940s, after applying what he learned in the furniture business, IKEA was born. From the initials of his name and the place where he grew up, IKEA now owns more than 300 stores in more than 35 countries and has a workforce of more than 130,000 workers in order to bring to the world a functional, great quality and much lower price than competitors’ furniture.

In this paper, we would discuss the political, economic, environmental, strength, weakness, threats, opportunities, technological, and legal aspect of opening IKEA here in Egypt and why we believe it is a good idea for IKEA to open in the Egyptian market. We would then make recommendation for IKEA and also analyze IKEA concept further in relation to being an international company. 2. 1. How the concept IKEA Began The IKEA Concept began when Ingvar Kamprad, an entrepreneur from the Smaland province in southern Sweden, had an innovative idea.

In Smaland, although the soil is thin and poor, the people have a reputation for working hard, living frugally and making the most out of limited resources. So when Ingvar started his furniture business in the late 1940s, he applied the lessons he learned in Smaland to the home furnishings market. Ingvar’s innovative idea was to offer home furnishing products of good function and design at prices much lower than competitors by using simple cost-cutting solutions that did not affect the quality of products.

Ingvar used every opportunity to reduce costs, and he scraped and saved in every way possible – except on ideas and quality. This is how the IKEA Concept began. The name IKEA comes from the initials of Ingvar Kamprad, I and K, plus the first letters of Elmtaryd and Agunnaryd, which are the names of the farm and village where he grew up. Today, the IKEA trademark represents the leading home furnishings brand in the world with more than 300 stores in more than 35 countries and more than 130,000 co-workers. 2. 2. IKEA concept, Mission and Vision

IKEA Vision is to create a better everyday life for the many people. The IKEA Concept is based on offering a wide range of well designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them. Rather than selling expensive home furnishings that only a few can buy, the IKEA Concept makes it possible to serve the many by providing low-priced products that contribute to helping more people live a better life at home. The IKEA Concept guides the way IKEA products are designed, manufactured, transported, sold and assembled.

All of these factors contribute to transforming the IKEA Concept into a reality. 2. 3. The main reason behind IKEA The main reason behind Ikea’s success is attributed to its low cost and difference in products. Keeping the cost down at very rational level that is between the manufacturers and a customer was a crucial factor which contributed to its remarkable success. Costs were managed starting from the design level of the value-added chain, by packing items compactly in flat standardized emblazes and stacks as much as possible to reduce storage space during and after distribution in the logistics process.

Furthermore, Ikea’s outlets were also designed on strictly self-service theme customers are required to transport and assemble the products themselves. In addition to these IKEA strategies of offering various facilities including, cafes and playgrounds for kids also accounted for its success. Ikea’s value proposition “Low price with meaning” was the key to its market penetration. To evaluate the success of Ikea strategy, Ikea can compare its strategy to similar chains, such as Carrefour. As such similar chains have showed a tremendous success in Egypt.

Egyptian people always seek low prices; as most of them have low purchasing power and have different facilities in the shopping place. When Ikea compare its strategy to similar companies with same condition, the benchmarks can be generated from such comparison depending on similar obstacles and risks to be overcome. Beside, Ikea can evaluate its benchmarks success by customer satisfaction, volume of sales, profitability, product repurchasing. On the other side, if the benchmarks were not met, Ikea can change its strategy from global to multi-domestic after studying the needs of the Egyptian market and satisfy its demand. . The Main Strategic Problem in IKEA IKEA has not Been Proactive in Accepting the Specifics of new market and Tailoring some of its products to satisfy Local Market. 3. PESTAL Analysis of the Macro- Environment 4. 4. Political and legal Side in Egypt Egypt political stability plays an important role in attracting investments as investors look for minimum political risk where it is the likelihood that political forces will cause unexpected and drastic changes in a country’s environment that significantly affects the opportunities and operations of a business enterprise.

To assess Egypt’s political risk, first we should study the relative power of the dominant groups. Egypt’s political system is semi-presidential republic. In this system the executive power is divided between the President and the Prime Minister. However, in practice, the president of Egypt wields much more power than the prime minister as he heads the executive branch to which the constitution grants wider powers. Mubarak is considered to be one of the most powerful leaders in the region. Mubarak is most likely to win another presidential term, elections to which will be held in 2011.

Egypt is a state dominated by a single party; the ruling National Democratic Party (NDP) is currently holding all the power. Hosni Mubarak, the ruling president, has headed the NDP since 1981. Other political parties are allowed by the constitution, although their chances of winning the elections are very low. Thought out the presidential period of Hosni Mubarak, a lot of investment entered Egypt, as large investments and businesses are not afraid of expropriation of corporate assets without adequate compensation, or forced sale of equity to host- country nationals usually at or below depreciated book value.

Also foreign firms are not facing discriminatory treatment against in the application of regulations or law. Finally it is very easy in Egypt to repatriate funds. Also, with regards to foreign policy, Egypt continues to emphasize the need for an effective and influential role for itself at both the regional and international levels. The authorities believe in having important synergies in the economic and political realms with the different countries of the Arab World. Relations have been strong with the EU owing to an exhaustive trade link with the various countries of the EU.

In Egypt. It is also crucial to study the important parts of the legislative system that would be more applicable to a company such as IKEA; It is worth mentioning that there was lately a lot of legislative reforms , for example, in 2005 tax law amendments aims at simplifying tax payment procedures and reducing the overall tax rates in order to widen the tax base and thereby increase revenues. The corporate tax rate was reduced from 42% to 20% and the highest individual income tax rate was reduced to 20% from the previous rate of 40%.

Largely as a consequence of these changes, tax revenues increased by almost 28%. This tax reforms reduced corruptions and bribes in the taxation system which improved the perception of the investor to the taxation systems in Egypt. Moreover, one of the goals set by the government in 2006–07 is to increase the investment rate to about 20% of the GDP. The government is trying Streamline red-tape and bureaucratic procedures. In addition, they are moving to promote the privatization programme that encourages investors with different nationalities to buy and invest in Egypt. 4. 5.

Egyptian Economy Egypt’s currency is the Egyptian Pound. The GDP (2008) is $452. 5 billion and the GDP growth (2009) is 4. 7 %. Inflation reached 13% (Oct. 2009) and it continues to increase. The gap between the rich and the poor is considered to be large. The amount of imports based on F. O. B is $56. 43 billion (2008). The main import partners are: the United States of America (11. 7%), China (9. 7%), Italy (6. 4%), Germany (6. 3%), Saudi Arabia (4. 7%) and Russia (4. 3%). Egypt has a very good geographical location. It has access to the two seas: the Red and the Mediterranean.

The Suez Canal is considered to be an important international trade enhancement factor as it connects Europe and Asia. Being close to the European Union gives Egypt the chance to increase its world trade rapidly. Egypt has the largest population in the Arab World. In Africa, Egypt is the second most populous country after Nigeria. Population reached 90 million in 2005. A large population equals a big market and that grasps the attention of foreign investors. The main economic problems facing Egypt are poverty and unemployment. The labor force is expected to grow by about 3% annually over the next ten years.

Also from the barriers facing the economic development are high level of corruption and bureaucracy. Egypt’s transparency international’s corruption perceptions index 2009 ranks 111th out of 180 close countries. 4. 6. Egyptian Socio-Cultural environment The Egyptian history records seven thousands years. Egyptians look at their country past with pride, but they are distrustful about the future. The modern Egypt is different from ancient Egypt in mostly everything: the people, religion, cultural artifacts…Etc. The modern culture is highly influenced by Islam.

Literacy reached 48% over the age of fifteen. The number of literate men is twice that of women. Egypt is facing the problem of mismatching between the education direction and the required skills for the jobs in the Market. The labor force counts 20 million Egyptians; 36% working in the government ;amp; public sectors, 34% in agriculture and 20% in service and manufacturing. About three million Egyptians are working in the gulf Arab States and Saudi Arabia leading to a deficiency in the skilled labor required for developing the Egyptian industry.

About 3000 expatriates are in Egypt, most of them are living in Cairo which is the capital. Several associations like “The Community Service Association” which is located in El Maadi support those expatriates. Arabic classes and sessions about the Egyptian life basics are provided to help for their adaptability. Most Egyptians can understand and speak English well so foreigners can communicate easily even if they do not speak Arabic. 4. Porter’s five forces Model Competition Among Established Company, Threat from established companies like In ;amp; Out, Estikbal and other small manufacturers like in Damietta.

Substitute products, Threat from the modern furniture substitution like steel or classic furniture. Bargaining power of supplier, not present as the company has 1220 suppliers in 55 countries and not dealing with local suppliers. Bargaining power of buyers, present due to the availability of substitutes that are offered by competitors in the market. Risk of Entry by potential competitors, some companies working in the field of office furniture could start making home furniture like MOHM. 5. IKEA Resources, Competences and capabilities 6. 7. IKEA Resources 6. 8. 1.

Financial resources Figures for the IKEA Group intends fiscal year 2009 (1 September 2008-31 August 2009). IKEA Group’s sales for fiscal year 2009 increased by 1. 4 percent to total 21. 5 billion euros. Sales, At the end of fiscal year 2009, there were 267 IKEA stores in 25 countries with everything for the home under one roof. Last year 590 million customers visited IKEA stores in order to draw inspiration from our exhibitions to show our products in various interior environments. Want to learn more? Go to IKEA stores. Below is IKEA Sales figures form 1999 till 2009.

The top five sales countries, Germany 16%, U. S. 11%, France 10%, UK 7%, Italy 7%. 6. 8. 2. Physical resources IKEA stores Purchases, IKEA has 31 shopping service offices in 26 countries. This means that we are close to our suppliers – approximately 1220 suppliers in 55 countries. It makes it easier for us to monitor production, test new ideas, negotiate prices and control the quality while keeping an eye on social issues and working conditions. The five largest purchasing countries China 20%, Poland 18%, Italy 8%, Germany 6% and 5% Sweden.

Employees, IKEA Group has 123 000 employees involved in everything from purchasing, distribution, wholesale, catalog, retail, various support functions and Swedwood Group. Distribution, IKEA has 28 distribution centers and 11 customer distribution centers in 16 countries. We use flat packaging, transporting goods by train and ship whenever possible and use fuel-saving technology to be as cost effective and environmentally friendly as possible in our shipments. Assortment, Today, the IKEA range of home furnishing products are designed to be functional and have a nice design, but still have a low price.

All products developed by IKEA of Sweden which is also responsible for giving each product a name, such as BILLY and cliff. Want to learn more? Go to Our range. Catalogue, Last year was printed more than 198 million copies in 56 different editions in 27 languages. Industry, Swedwood Group is the IKEA industrial group. Swedwood dealing with wood based furniture production and manufacturing of wood components in 46 plants in 10 countries. 6. 8. IKEA Competences and capabilities Good suppliers relationship management (the company has 1220 suppliers in 55 countries ).

IKEA Using its resources effectively by using leftover materials from the production of one product to create an entirely new one. IKEA designers do their part to keep prices low by using production capabilities from other areas in unique and previously unimagined ways – like having shirt factory produce furniture upholstery. IKEA customers also contribute to keeping prices low. They select and pick up the products themselves, transport them home and then assemble them themselves. And they can enjoy them already later that day. The many people have many needs.

They live with kids. They need more storage. They have to make the most out of a small space. So IKEA designers are always seeking new ways to improve people’s lives – without emptying their wallets. But how can good design and function be combined with good quality, all at a low price? It starts with focusing on what’s important. Will an expensive finish on the back of a shelf or under a table-top improve the function? Absolutely not. So IKEA designers do not do it, because a product is of no use to the customer if it is not affordable. . SWOT Analysis Strengths| Weaknesses| * Clear vision. * A strong global brand. * Using new technologies & ‘Smarter’ use of raw materials. * Creating long-term partnerships with its suppliers by large volume commitments. * Sourcing materials close to the supply chain to reduce transport costs. | * size and scale of its global business could make it hard to control standards * low level of customer service * The needs to keep good communication with its consumers and other stakeholders. | Opportunities| Threats| A growing demand for low priced products * IKEA are moving from International to global * E-commerce and multichannel retailing. * Egypt offers IKEA an opportunity to export its products to the MENA region Countries through its ports. | * More competitors entering the low price household and furnishings markets. * recession slows down consumer spending * Slowdown in first time buyers entering the housing market which is the core market segment for IKEA| 7. 9. The Following Strategies would be great for IKEA: 7. 10. 3. SO strategies:

IKEA should use its price and quality in the market with such a large potential customer. This is done via advertising its good-quality-low price products Further reduce the costs via its reliable supply chain and good relationship with its suppliers. Strong equipment maintains the fact that the company can increase its capacity and increase its wood use, with the competitors still regaining from the financial crisis, IKEA can gain large market share and further increase its hold on the market, thus enabling the execution of competitors out of the market. . 10. 4. WO Strategies: Because competitors are in financial crisis: IKEA can concentrate on increasing the loyalty of its employees and also increase their morale by making them take part of the decision process It can by-pass the imitation problem by gaining the competitors market in Egypt and thus it could help gain more game over its competitors and over the international competition as well should there be international competition. 7. 10. 5. ST strategies:

China entering the market as well might be conquered by China’s bad reputation to producing low qualities and the fact that IKEA sells at reasonably low prices as well. Even with the ease of imitation, the market offers a large compensation with the fact that IKEA can still have the large piece of the cake by intensive advertising campaigns. 7. 10. 6. WT Strategies: With the threat that china can copy-cat IKEA’s products and sell them as even lower prices. IKEA should try as much as possible to avoid making itself an easy target by increasing its hold on the market and giving back to the ountry by doing charitable events which will increase customer loyalty and also improve its reputation. The firm should purse an aggressive global strategy: IKEA has standardized furniture with a worldwide appeal as it is trying to capture the global market. For Egypt, by combining the core competency, the external and internal analysis, we realize that continuing the line of global strategy is the right way to continue and enter Egypt. By investing in the Egyptian customer and by doing better research about Dumyat, then IKEA can enter the market with ease.

IKEA can decide to make heavy advertisement, promoting surprise based information: imagine IKEA with nothing beside it but a large question mark and tag line beneath it “IKEA, the new era of furniture”. Consumer will be divided into those who are curious and those are not, those who are curious will then be the first movers and will be the ones to buy the product. Once they realize the product is of good quality, they will then start telling more and more people and word of mouth will travel well, thus increasing IKEA’s hold on the market.

Given Dumyat’s power over the furniture market, the attack from IKEA might trigger the labor market [which Dumyat has a quarter of the labor market] to withhold the labor of the market for IKEA, which is not a threat because Majid Al Futeim [owner and founder of the El Futeim group, and also the license holder of IKEA and Carrefour middle east] will just simply ship new blood into the labor market and send in new labor to supply. This move will create synergy in IKEA and will create a new core competency which is fresh supply of labor.

Also with the original core competency of having high quality-low-priced products, the Egyptian market for IKEA will be easily entered despite the large market share held by Dumyat and also with the threat of China entering as well. Thus this will remedy the weakness, allow for economies of scope and risk reduction. These strategies will be implemented as I mentioned above, by intensive advertising of the IKEA brand name. We would start by first introducing the concept of IKEA’s high quality, keeping in mind that there is Dumyat, with its large labor and market share.

The advertising would overcome this threat by being proactive in the market. By impounding the market with advertising the strategy of IKEA would work and the strategy would be implemented smoothly. 7. IKEA’s Current Strategic Position IKEA current statefic position can appear in three strategic options (competitive advantage, Bouman’s strategy and ansoff’s product/ market-Matrix) 8. 10. Competitive Advantage 8. 11. 7. Cost Leadership IKEA uses leftover materials from the production of one product to create an entirely new one.

IKEA’s Customers select and pick up the products themselves, transport them home. IKEA designers do their part to keep prices low by using shirt factory produce furniture upholstery. 8. 11. 8. Product Differentiation IKEA’s Customers assemble the products by themselves. 8. 11. Bouman’s Strategy High High Low Low Perceived product benefits Price Differentiation hybrid Low price ‘no frills’ Focused Differentiation 6 7 8 1 2 3 4 Strategies for ultimate failure 5 IKEA 8. 12. Ansoff’s Product/ Market-Matrix Existing New Existing New Markets Product 8. Strategic Options . 13. To Target new segments for example; Resorts and hotels not only good Standards people and expatriates. 9. 14. IKEA should perform detailed Market research and studies of individual market tastes and get a feel for its Unique Customer. 9. Recommendations A Successful approach is to maintain IKEA brand and IKEA way but also to produce and market unique products for the Target market otherwise the initial novelty of the products wears off, customers will begin to realize that the product are impractical for their country and will switch to the local competition.

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