Ikea Expansion In South Africa - Entry Strategies

International Trade Managemet

1

Contents 1.Introduction ............................................................................................................................................... 3 2.The Company ............................................................................................................................................. 4 2.1.SWOT Analysis .................................................................................................................................... 6 2.1.1.Strength........................................................................................................................................ 7 2.1.2.Weakness ..................................................................................................................................... 8 2.1.3.Opportunities ............................................................................................................................... 9 2.1.4.Threats ........................................................................................................................................... 10 3. PESTLE Analysis ....................................................................................................................................... 10 3.1. Political factors ........................................................................................................................... 10 3.2. Legal factors ..................................................................................................................................... 11 3.3. Economic factors.............................................................................................................................. 12 3.4. Socio cultural factors........................................................................................................................ 14 3.5.Technological factors ........................................................................................................................ 15 3.6. Environmental factors...................................................................................................................... 16 4.Internationalization Strategy ................................................................................................................... 17 4.1. IKEA’s local competitors in South Africa ........................................................................... 18 4.2. Entry strategy options ...................................................................................................................... 19 4.2.1. Direct exporting ............................................................................................................................ 20 4.2.2. Wholly owned subsidiary .............................................................................................................. 20 4.2.3. Joint venture ................................................................................................................................. 20 4.2.4. Franchising .................................................................................................................................... 21 4.3. Marketing mix .................................................................................................................................. 21 4.3.1.Product........................................................................................................................................... 22 4.3.2.Price ............................................................................................................................................... 22 4.3.3.Place ............................................................................................................................................... 22 4.3.4. Promotion ..................................................................................................................................... 23 5. Conclusion & Recommendations ............................................................................................................ 23 References .................................................................................................................................................. 25

2

1.Introduction Founded in Sweden in 1926 by Ingvar Kamprad, using his family’s farm as the base for “supply chain”, IKEA has become a global leading company in the furniture sector (IKEA 2018). Today IKEA has just under 700 million visitors a year to 403 stores in over 49 countries having more than 190.000 employees working together around the world. Moreover, IKEA's total income increased by 1.7% or approximately €36 billion, retail sales was €34.1 billion, and rental revenue from Centers was €1.0 billion (IKEA 2017, BBC 2017). The IKEA Concept is to provide “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” (IKEA Systems 2017). IKEA provides a broad range of furnishing products from all household, baby and children goods, to food items (IKEA 2018). This remarkable variety of products is particularly due to the reality that IKEA is outsourcing its manufacturing. It takes benefit of the inexpensive manufacturing sources available globally (HBR 2018). In order to reduce the costs, IKEA’s products are mostly produced in developing countries and assembly of these products is done by consumers to save spot and simplify the manufacturing process (HBR 2018).

3

This paper aims to analyse IKEA’s internationalisation process into South African market referring to relevant theories such as SWOT and PESTLE analysis. Moreover, there will be an evaluation of different entry modes examined; through this identification the most suitable entry strategy will be chosen. The last section will provide an appropriate conclusion by covering also further recommendations for the company.

2.The Company IKEA combines quality, function, value, design and sustainability to provide a vast range of ready-to-assemble home furnishing products at an affordable price (IKEA, 2018). It offers a wide variety of products from plants, toys, kitchen appliances to furnishings for living-rooms (IKEA, 2018). They have about 12,000 products of which each store has a selection of the 12,000 products, provided by 1,350 suppliers from 50 different countries (IKEA, 2018). Majority of their products are sourced from Europe (64%) and Asia (33%), focusing on cost-efficiency and quality. Apart from offering home products, IKEA offers services such as delivery, installations, financing etc. (fantastichandyman 2018, The Economist 2017) to save time and effort for customers. IKEA also operates its cafes in its stores since 1958, where 30% of shoppers come only to eat, earning them $1.6 billion in revenues in 2016 (Maynard, 2017). IKEA is involved in 4 industrial sectors which are, Raw materials, Manufacturing, Distribution and Retailing (Businesscasestudies 2018, Financial Times, 2016). The company develops natural resources such as timber and minerals themselves and also procures raw materials from different suppliers. They use the raw materials to manufacture them into finished products and use their distribution

channels

to

deliver

the

products

(Businesscasestudies, 2018).

4

to

their

stores

around

the

world

Real estate industry, expansion, urbanisation and disposal incomes have enhanced the world home décor market growth and market player opportunities (Alliedmarketresearch 2015). Additionally, customer preference in regards to adaption and eco-friendly products usage have risen, thus something IKEA understands (Alliedmarketresearch 2015). IKEA’s produces products which have insignificant impact on the environment.

IKEA’s sale per region Source: Statista 2017

Source: Statista 2017

5

Source: Euromonitor 2017

2.1.SWOT Analysis Strength

Weakness

6

·

Good quality at lowest prices

·

Dependent on Europe

·

Vast product range

·

Product recalls

·

Targets diverse customer segments

·

Does not target premium market

·

Multi-channel retailing

·

Existing brand image

·

Focus on sustainability

·

Internationalization Experience

·

Extra Services

Opportunity ·

Threat

Growing furniture industry in Americas and Europe

·

Growing online retailing

·

Restaurant

·

Growing furniture market in South Africa

·

Intense competition

·

Rivals using competitive pricing

·

Rising labour costs in Europe and china

2.1.1.Strength IKEA is able to produce good quality products at the lowest prices, compared to its competitors (Panagiotaropoulou, 2015; Circleinternational.co.uk, n.d.). They are capable of doing this as they maintain a cost-effective supply chain in both Asia and Europe. IKEA also makes unassembled furniture that are assembled by customers, thus reducing transportation costs further (European Commission, 2008) . The lower costs are reflected in the prices offered to customers, which competitors are not able duplicate, and charge higher prices for the same quality of the furniture they produce. IKEA has the largest range of products under their umbrella. 12,000 different products provide extensive furniture for kitchen, dining, bedroom, living room, children room, office room and offices and hospitality. Having an extensive line of products enables them to cater furnishing to all clients (Scott, 2018). As IKEA is able to target a diverse customer group effectively, it 7

provides them an edge over its competitors (Researchgate, 2010), as most of its competitors are not able to reach such diverse customer groups. IKEA uses multi-channel retailing which includes integration of stores, catalogues and ecommerce (McKinsey&Company, 2009) to satisfy its diverse customers. It has 2.1 billion visits to Ikea.com and 137 million visits to its catalogue and store apps (IKEA, 2018). Using the multi-channel retailing strategy, it shows that shoppers have a higher frequency and value of purchase than the single channel customers, allowing them to dominate amongst its competitors in the multi-channel retailing industry. Company’s trivial brand image and substantial market presence boosts their bargaining power (Harapiak, 2013). IKEA is a household name in 49 countries, with 417 stores in 2017, and are often seen in advertisements, purposely sustaining their presence in the mind of its customers, allowing them to stay ahead of their competitors. With a significant focus on sustainability they have strengthen their brand image further by creation of goodwill and responsibility in the mind of their consumers and stakeholders. They have been working on sustainability since 1990’s, focusing on sustainable products and sustainable way of using resources (edie.net, 2018; Rowell, 2017). IKEA applies Product Sustainability Scorecard, a tool to build business case for and measure, development of further sustainable products as 54% of their sales were of more sustainable goods (IKEA, 2010). Its experience in internationalization highly benefits IKEA, as they are aware of different conditions to operate businesses in (Jonsson and Foss, 2011) Other services such as delivery, financing, restaurants, among others, are added value to Ikeas customers (Harvard Business Review, 2015), making them different from its rivals.

2.1.2.Weakness

IKEA has its highest market share in Europe with 79% , and proving to be over dependent on Europe (Dawson and Mukoyama, 2013). Having an overdependence increases the risk of exposure to local climatic and economic conditions such as economic recession, labor strikes, bre-exit and higher wages, among others (Hill, 2011). This increases the business risk and can affect its business opportunities in other markets.

8

IKEA has had several products recalled in recent times. For example, in 2016, IKEA recalled all its GOTHEM table and floor lamps due to a danger in electric shocks (LIN, 2016). In 2016 they recalled HYBY or LOCK ceiling lamps as customers reported that the glass shades were falling from the lamps (BBC News, 2016) , among other recalls. Recalls of products can affect the brand value brand image, resulting in lower sales. The recent tax investigation taken up by the European Union claiming Ikea’s corporate tax avoidance since 2006 (Ft.com, 2017) is also contributing to the questioning of Ikea’s transparency and responsibility. Further events such as these can affect the brand value and image, resulting in lower sales and lower perceived brand value. IKEA does not target the premium market with luxury items (Soliman, 2016). As they only target middle-income and aspiring middle-income markets, the revenue from the premium market is lost to competitors like Zara.

2.1.3.Opportunities

The furniture industry is growing in a constant rate around the world. The American furniture is said to grow at around 2.9% CAGR through 2019 (Brand, 2017). The furniture market in Europe is predicted to grow slower than America’s at 2.0% till 2021 (Statista, 2018). The online retail business is growing faster in both the countries. IKEA can capitalize in this growth as they have the highest financial and managerial capability in the furniture industry. Ikea’s restaurants are highly rated by some customers, as 30% of shoppers come to only eat at IKEA (Forbes, 2017). They can begin their own separate restaurant businesses, thus tapping into a different segment, and enjoying higher profits. Africa expects a growth in the furniture market of 11.8% CAGR until 2022, from US$351m in 2018 to US$547 in 2022 (Statista, 2018). IKEA can capitalize on this growth to spread its risks and reduce its dependence in Europe. The South African government said in its Industrial Policy Action Plan (IPAP) that it will boost the capacity of the furniture manufacturing industry (allAfrica.com, 2016), referring to aids and subsidies, as it will reduce unemployment and increase exports.

9

2.1.4.Threats The furniture industry is highly competitive where high fragmentation of the market exists and sales coming from independent dealers, local and international chains, furniture centers, manufactured-owned stores, national and local chains, mass market retailers and department stores (Schneider, n.d.). Rise in sales for such stores can lead to lower sales for IKEA, which can have negative impacts on Ikea’s business. Companies like Walmart, Asda, Tesco, etc. use competitive price cuts to the increasing pricing pressures which leads to losses. This forces IKEA to reduce their prices and experience fall in profits, effecting their business (Wood, 2011) The wages of labor have been increasing in Europe and china. This can adversely impact the cost of production for IKEA. The hourly wage in China in 2016 was $3.60, spiking 64% from 2011 (Yan, 2018), and is still on the rise as the demand for Chinese labor rise. The hourly wages in the Euro area increased by 1.5% and 2.3% in the EU-28 in the 4th quarter of 2017 (Ec.europa.eu, 2018). Economists predict that the labor wages will continue to increase in the future. Ikea produces majority of its products in Europe and China and with current rise in the costs will hamper the profitability of Ikea’s products.

3. PESTLE Analysis 3.1. Political factors

South Africa has a parliamentary democracy, and it is a federal republic. The president is both the head of the Government and chief of state. The President serves a five year term and is usually elected by the Parliament (Heritage, 2018). Current Leader o President: Cyril Ramaphosa ANC (Since 2018 February) has a promising agenda, to stabilise the economy and structural reforms (TheGudian 2018) thus suggesting stability and continuity in government, post 2019 elections

10

o Executive Deputy President: David Mabuza ANC (Since 2018 February) In terms of the legislative power, there is a bicameral legislature in South Africa. Under the proportional representation, parliament members are elected through a popular vote, to serve a five year period (SantanderTrade 2018). Government’s efforts to encourage FDI: Foreign investors are able to enter most business sectors. No governmental approval is needed and there are minimal restriction on the way in which the foreign entities will invest and the amount (SantanderTrade 2018; BusinessLive 2018). Furthermore, numerous measures have been implemented by the government, including better regularly policy on competition, protection of intellectual property (Deloitte 2016), incentive and simple tax rules (Economist 2018). An example of the measure is the skills support programme which offers 30% of workers’ salaries and 50% of training costs (SantanderTrade 2018) thus beneficial to Ikea. Alternatively, the political interference within South Africa, makes the judicial system progressively vulnerable, regular political backbiting and several scandals have brutally undermined the integrity of the government (Heritage 2018). The corruption index 2017, rank South Africa 71 out 180 (Transparency 2018) thus suggesting the insufficiency of the anticorruption statutes enforcements. Keeping records, accounts and books, which truthfully reflect Ikea’s assets and transaction, will reduce corruption.

3.2. Legal factors In 1994, South Africa saw the beginning of democracy, which led to fair rights within the Bill of Rights and the Constitution (Labourguide 2018). In the Constitution the following rights are protected: Section 18: Freedom of Association and Section 23: Labour Relations e.g. striking and fair labour practices (Legalandtax 2016). Refer to figure 1, for key employment laws, crucial to Ikea operating efficiently within South Africa. Employment law

11

Source: Employment laws (Ilo 2002; PWC 2017)

3.3. Economic factors The leading economy is Sub-Sahara is South Africa, in front of Nigeria. 75% of the largest African companies originate from South Africa and the subsoil is very rich (Focus 2018; BBC 2016). The economy depends heavily within the mining sector, in addition to the vigorous financial and agricultural sectors (SantanderTrade 2018). Ikea will belong to the third largest sector trade (Refer to figure 1). Furthermore, within the continent South Africa has the largest stock exchange (Heritage, 2018). South Africa’s GDP, is likely to increase from 0.8 % 2017 (Statssa 2018) to 1.6% in 2018/2019 (IMF 2018). The purchasing power parity (PPP) has gradually increased from 750 billion USD to 757.2 billion USD (CIA 2018). GDP per capita has decreased slightly from, 416, 87 billion USD in 2011 (Worldbank 2000; WTO 2000) to 294.84 billion USD in 2016 (Statssa 2018; TradingEconomies 2018). South Africa is the 4th largest producer of diamonds (MiningAfrica 2017). In 2016, South Africa imported $73.7 billion and exported 69.1 billion, causing a negative trade balance of $4.57 billion (Atlas 2017). Moreover, 4.2% is the average applied tariff (Heritage 2018). Moreover, non-residence are only taxed on income obtained within South Africa (Deloitte 2016). Top cooperate tax is 28% (Deloitte 2016). Moreover, taxes consist of capital gains taxes and valueadded (Heritage 2018).

12

Services contribution to the GDP (AgriCouncil 2017)

Economy Activity by sector (WorldBank 2018)

Macro-Economic Indicators of South Africa:

It can be concluded that South Africa’s growth has slowed down because of the global competitiveness decline, political instability growth, and the decline in rule of law that occurred in 2017 thus affecting investment-grade credit rating, to be reduced to a junk bond status, 13

damaging the investor’s confidence in the country’s economic stability (Heritage 2018). In addition, Ease of doing business has dropped from 32nd in 2008 to 86th in 2018 (Doing Business 2018). The government must sustain macroeconomic constancy while facing a mixture of spending pressures, rising public debt and state-owned enterprises inefficiency (Santander 2018). Furthermore, inequalities and poverty are causes of high risk (demonstration, crime and strikes) (Coface 2018; Euromointor 2017; OECD 2017; Goldmansachs 2015). Roughly 16.6% of the population live below the poverty line (DailyMaverick 2018), unemployment has risen to 27.7% (CIA 2018), 54.3% of them, are aged between 15 and 24. Additionally, HIV/AID is a constant concern within South Africa (UN 2018). Hidden costs seem highly likely within South Africa, therefore Ikea will need to overestimate budget. Additionally, Ikea will need to purchase insurance to cover them, against the high crime risk.

3.4. Socio cultural factors Within South Africa, highly-skilled labour force, is in short supply (Coface 2018; Economist 2018) and immigration laws make hiring foreign workers challenging (Santander 2018). Lastly, South Africa is reliant on volatile flows of foreign capital and it has inadequate infrastructures e.g. energy and transport (EY 2017; Santander 2018).

The better life index (OECD 2017)

14

South Africa’s population is 57.19 million (WorldMeters 2018) and by 2050 South Africa is estimated to have risen to 72.75 million (UN 2018). The urban population consists of 62.9% in 2018 (Mckinsey 2017; CIA 2018) and the labour force grew by 577 000 to 22.19 million (CIA 2018; Statssa 2017). Additionally, 36.6 million inhabitants are of the 15-64 working age (Statssa 2016). South Africa is a young nation with a medium age of 26.8 (WorldPopulation 2018) thus vital for Ikea who targets young families with average incomes. South Africa’s official business language is English which is spoken by 9.6% of the population and Afrikaans 13.5% (SantanderTrade 2018; CIA 2018). Additionally there are 11 official languages (BusinessTech 2018). It can be assed that the new ‘black middle class’ is relatively brand conscious and has a high spending power(McKinsey 2018). South Africa’s middle class have a household income of 465.81 USD and 3328. 00 USD excluding tax (MG 2016). Their average disposable income is 10, 872 USD (OECD 2018) and in Johannesburg its 20,900 USD (Euromonitor 2016) thus suggesting Ikea should enter Johannesburg first due to the vast opportunities. These customers seek classy goods, and they have a tendency to spend minimal on housing or vital commodities (SantanderTrade 2018).

3.5.Technological factors Within Africa, South Africa has the biggest market in information technology (Export 2017; HBR 2016). South Africa, possess technological leadership within security software, software field and electronic banking services (Export 2017) thus highlighting Ikea’s potential reliability and protection of users when Ikea eventually enters the online retailing. As a result of South Africa’s electronics and ICT sectors both developing and sophisticated thus strong contributing factors to the rise of private consumption through smartphones (ITNewsAfrica 2017). However, due lack of inner-city infrastructure and connectivity, rural area will remain price sensitive (HBR 2017; MG 2017). Furthermore, free Wi-Fi Hubs have been created within numerous metropolitans’ areas, specifically within townships (PWC 2018; Export 2018). There are currently 10, 000 Wi-Fi hotspots around the country due to the demand increase (BBC 2017).

15

3.6. Environmental factors By 2020 South Africa has made a self-determined pledge to decrease greenhouse emission by 34% (Ensafrica 2017) and 42% decrease by 2025 (PracticeLaw 2017). However the government’s target needs a substantial amount of help from developed markets. Moreover, Ikea’s core values are in line with the government’s agenda thus suggesting Ikea’s prosperous growth within South Africa. The challenges faced within South Africa are multifaceted: Limited underground aquifers, low rainfalls and South Africa is heavily dependent on neighbouring nation’s water transfers (BCG 2017; Mckinsey 2015; UN 2011). In addition, It has been highlighted that the basins which supplies large cities e.g. Cape Town are predicated to endure severe gaps brought by increase industrial household demand (Refer to figure below).

Figure 6: Water demands (Mckinsey 2015) Within South Africa, 0.4% of the country’s landmass is govered by natural foresets, although it isn’t vast, there is a potential for Ikea to manufacture within South Africa (Foresty 2016).

16

Figure 7: South Africa’s forests (Foresty 2016)

4.Internationalization Strategy Overseas market actions of an international company are strongly relying on its entry mode option . Electing an appropriate entry strategy is vital for company’s success or failure in the new market due to the fact that one the entry strategy is chosen it will be part of the long term internal procedures and thus, it cannot be modified in the short term if the expected outcome it is not achieved (Mitra & Golder, 2002). Doz and Prahalad (1984) enlightened the idea according to which there are four main categories of international strategy that might be adopted as shown in the above figure. The strategy is highly dependent on the local openness and global integration pressure.

17

In terms of internationalization process, IKEA has pursued the Uppsala Model by entering in the surrounding markets where the psychic distance is minimal. The expansion into more distant ones came later as they needed to acquire more market knowledge ( Johanson & Vahlne 1977).

4.1. IKEA’s local competitors in South Africa Burke and Hussels (2013) stated in an article in the Harvard Business Review that organizations which are exposed to competition early into their operations establish an immunizing effect and its life span increases in long-term survival perspective. The South African market of home furnishings instil several competitors with low market shares. In the image 2A can be seen the market shares of the companies in the industry, showing no dominant players.

Source: Euromonitor International, 2018 The competitor, Mr Price offers modernized products that are designed locally using low-cost, low- price strategy, targeting mass lower and middle customers who want to buy knock-down and completed furniture, stretching from home accessories, kitchenware to home textiles (MrPrinceGroup, 2018). They possess the highest market share value of 5.5% in 2016 (Passport, 2017), proving to be one of the market leader but not having dominance over competitors. In an interview of a manager from Mr Prince’s stores, he stated that it is difficult to manufacture quality products at an affordable price (Vukovic, Zarifnejad and Lundgren, 2010), thus not being able to deliver high quality, at affordable prices. South Africa’s third largest furniture brand is Lewis of Lewis Group Limited, which was founded in 1934, operates 761 stores in South Africa and contributes 70% of the group’s sales. 18

They are small stores from 450 square meters to 250 square meters (Lewisgroup, 2018) compared to Ikea’s average store size of 27,871 square meters. They sell home furnishing to electronics and is known for credit sales, targeting lower to middle income groups (Lewisgroup, 2018). A part of the JD Group is Joshua Doore, also known as JD. It produces appliances, home entertainment, furniture, office automatn, targeting the mass middle segment of South Africa (Bloomberg, 2018). JD focuses in good innovative business and services, proposing large vareity of furniture, entertainment merchandisse and household appliances. However, it has lost its dominance in the past few years as their value of market shares has been declining since 2012 and has rrached 2.6% form a staggering 8.5% in 2012 (Passport, 2017) It has closed down several of its stores, claiming it to be their restructing strategy which focuses on less credit sales and higher cash sales (Euromonitor International, 2017)

Source: Euromonitor International

4.2. Entry strategy options According to Doz and Prahalad (1984) theory, IKEA used several strategies across the years such as "transnational", "global" and "international" one. Initially, the company has implemented it's international policy into Norway. However, later on, in 1980, the company decided to go 19

global with their standardized range products, by expanding in the United States. Later on, the company entered the Chinese market with a transnational strategy, making the necessary adjustments to suit the local environment (Hill, 2011). In terms of entering the South African market, there are four options such as direct exporting, franchising, wholly owned subsidiary, and joint venture partnership. In the following section each option will be discussed and most suitable one will be recommended.

4.2.1. Direct exporting Direct exporting will imply the outsource of the IKEA brand, namely exporting products to a South African furniture retailer, who would on-sell the products at his turn. One of the main advantage of this option is the initial investment low cost and low to none restriction, due to the trade agreements which are in place, for importing furniture into South Africa. Nevertheless, some negative implications for direct exporting are linked with the high costs of transportation and all the supply chain section, if there's little or scarce availability of producers nearby (Lévesque and Shepherd 2004).The cost pressure would impact IKEA's cost of goods and thus, might have a huge impact upon its attractiveness in the new market.

4.2.2. Wholly owned subsidiary Expanding through a wholly owned subsidiary option into South Africa might be considered a risky

option

due

to

the

high

cost

initial

investments

(R.E. Hoskisson, L. Eden, C.M. Lau, M.Wright 2000). However, this financial risk can be avoided through the establishment of a production facility in the market, as they did in Mexico. Other than this, the corruption and bribery risks have to be taken into consideration when taking such decision but, as an overall tendency, the offsetting these risks might bring to IKEA a full control of business, strategic flexibility and high profits.

4.2.3. Joint venture 20

A joint venture with a local partner will provide IKEA with the know-how with regards the local environment and culture, in order to avoid an unwanted approach, providing an significant advantage in terms of adapting the products and business model to local conditions (Xiaoyun Chen, Alex Xin Chen, and Kevin Zheng Zhou 2014). On the other hand, the possible risk that might arise in this case is linked with the loss in decision making process and therefore IKEA's loss of control upon its business. Strategies might differ and the conflict with the partner is considered a risk that the company has to consider.

4.2.4. Franchising Last but not least, the franchising agreement strategy is considered to be the most suitable option in this case, when entering the South African market, due to the fact that allows IKEA to have a full control upon its brand and strategy options, at a reasonable cost, the financial risk being a low one. Also, the profit margin might be lower than in the case of a wholly owned subsidiary. They will need to adjust and asses this strategy in conformity with the legislation and tax agreements before making a decision (Aliouche, H. E., & Schlentrich, U. A. 2011 ). In addition, IKEA has successfully franchised in other emerging markets such as Russia, Dominican Republic, and Eastern Europe which makes it easier as they already have experience (Alon, I. 2006).

4.3. Marketing mix In order to accomplish great success, IKEA has to make set of actions or tactics to promote its product and brand in the chosen market. The 4Ps helps in guiding and directing marketing and business strategy. Using it effectively, it helps business to learn about customers needs and behaviours (McCharty 1960:53). However, as new trends and technology emerge, accordingly to Harvard Business review, 4Ps may need to be updated to fit with 21st century consumer.

21

4.3.1.Product IKEA should continue offering stylish, functional products and home furnishing such as plants, toys, kitchen appliances to furnishings for living-rooms in the new targeted country (IKEA, 2018). However, in order to be successful, they need to adopt products to South African needs as they have smaller homes in comparison to western nations. In addition, IKEA should consider the opportunity to extend into the garden and outdoor products due to the South African high temperatures (Climate 2016).

4.3.2.Price The best option for IKEA would be to compete by targeting middle and upper classes in urban areas as both middle and upper classes buy products based on convenience and quality. Furthermore, young families who values affordable prices and quality furniture tend to be the most suitable customers for IKEA in South Africa. Using price leadership strategy will increase the company’s competency in terms of cost efficiency and improve supply-chain management abilities.

4.3.3.Place This section is highlighting the new market that IKEA should consider to enter. Firstly, investing in South Africa will considerably reduce the home bias, receiving a higher portfolio return. Secondly, South Africa is well known for its efficiency in terms of the financial factors, offering a high degree of protection for investors. As it’s shown in the below picture, South Africa has the biggest market share percentage compared with the other African countries. As referred to South Africa, IKEA should target the biggest rural areas where the buying power is higher compared to the rural ones. Some of the major cities that needs to be targeted are Johannesburg, Cape Town, Durdan and Pretoria (The Economist 2016).

22

Source:

FDI

Africa’s

hub

economics (EY 2016)

4.3.4. Promotion A majority (86%) of South African population are using cell phones. It is a mobile first market, while Internet use is still growing. IKEA's promotion strategy should be focused on wide use of mobile phone advertising, due to a huge increase in use of m-commerce and in Internet retailing via mobile phone in South Africa. In that way IKEA can reach South African consumers effectively. Although, the traditional media cannot be ignored as TV and Radio has still an enormous reach. Subsequently, IKEA can use its product catalogue and in that way expand their customer base.

5. Conclusion & Recommendations Accordingly to all conducted analysis, South Africa represents the best option for IKEA’s expansion into an emerging market. However, as mentioned above, a further recommendation for IKEA is to conduct an additional research at the local level before launching or making any investment. In relation to its competitors, a recommendation for IKEA is to enter the market sooner rather than later, so a competitive advantage in terms of expanding its brand awareness will represent a plus for them, benefiting from the moving at an early stage. In relation to the

23

entry mode into South Africa, the most feasible approach that can be undertaken by IKEA is the franchising one, maintaining in the same time its transnational strategy. The conducted analysis indicates that South Africa is most likely to result in success for IKEA. As was mentioned in the Product section, an investigation of South African’s cultural readiness should be conducted. If required, IKEA should customise its brand, product range and prices according to the local environment. Nevertheless, the past experiences in the emerging markets with the franchising model should consist a starting point in this expansion. IKEA needs to provide South Africans, with a multilingual sales team, to cater to customer’s needs. Furthermore, hiring a specialist agency to manage, guide and mitigate risks, is vital for Ikea’s success. IKEA should consider a budgeting system in conformity with the laws and regulations within South Africa which are 9 or 8 hours a day with an overall of 45 hours in a week (Ilo 2002). Thus, the minimum wage is R20 per hour (1.38 Euros), gaining R500 for 40 hour week (approximately 25 Euros) (Fin 2017). In addition, IKEA may need to take into consideration Cape Town and Johannesburg as the main targeted cities because of their substantial profit margins as a result of the growing middle class situated within these cities. Value perception is the biggest persuading factor for South African consumers, in regards to a retail store, brand and the purchasing decision (SantanderTrade 2018). When prices are priced fairly, South African are relatively brand loyal (Businesslive 2018) this therefore implies that Ikea’s modestly priced, ready-to assemble furniture will be successful in South Africa. Discounts are vital for the South African consumer, therefore they shop across numerous channels (Euromointor 2017). Customer service and after sales are tremendously important to South Africans, specifically in terms of space part services and providing technical assistance (SantanderTrade 2018). As a result, in up-coming years, IKEA will need to establish an online presence and provide their employees with extensively training, to stay competitive. IKEA should also bear in mind the high purchase costs of property in South Africa, high inflation, and high crime rate in some urban areas. To conclude, IKEA’s franchising option into South Africa represent a feasible procedure in entering the African continent and provides further opportunities to expand in the surrounding regions. However the board of directors should adapt this strategy according to local laws and regulations fitting the targeted market.

24

References: Agricouncil

(2018)

SA’S

Key

Economic

Sectors

[online]

available

from

[22 March 2018] CIA (2018) The World Factbook — Central Intelligence Agency [online] available from [22 March 2018]

Coface (2018) Economic Studies [online] available from [22 March 2018]

Economist (2018) South-To-South Investment Is Rising Sharply [online] available from [22 March 2018]

Euromonitor (2017)

Consumer

Lifestyles

In South

Africa

[online]

available from

[22 March 2018]

EY

(2016)

EY’S

Attractiveness

Program

Africa

2017

[online]

available

from

[22 March 2018] Finicaltimes (2018) South Africa’S Political Parties Forced Into Coalition Talks [online] available from

[22

March 2018]

Heritage

(2018)

South

Africa

[online]

available

from

[22 March 2018]

Labourguide (2018) Your Guide To Labour Law In South Africa [online] available from [22 March 2018]

25

Legallandtax (2018) THE RIGHTS OF WORKERS AND THE LAWS THAT PROTECT THEM [online] available from [22 March 2018]

OECD (2018) South Africa - OECD Data [online] available from [22 March 2018]

SantanderTrade (2018) General Presentation From South Africa [online] available from

[22

March 2018]

Stassa (2018) Economic Growth Better Than What Many Expected [online] available from [22 March 2018]

Theguardian (2018) Ramaphosa Vows Anti-Corruption Drive As He Takes Over In South Africa[online]

available

from


ramaphosa-to-be-elected-president-of-south-africa-jacob-zuma> [22 March 2018]

Transparency (2018) Transparency International - South Africa [online] available from [22 March 2018]

Worldatlas

(2017)

The

Economy

Of

South

Africa

[online]

available

from

[22 March 2018]

Hill, C 2011, International Business: Competing in the Global Marketplace, 8th edn, McGrawHill, New York, USA

McCarthy, E. Jerome (1960): Basic marketing, a managerial approach. Homewood :

Lévesque, & Shepherd. (2004). Entrepreneurs' choice of entry strategy in emerging and developed markets. Journal of Business Venturing, 19(1), 29-54. 26

R.E. Hoskisson, L. Eden, C.M. Lau, M.WrightStrategy in emerging economies Academy of Management Journal, 43 (2000), pp. 249-267

Xiaoyun Chen, Alex Xin Chen, and Kevin Zheng Zhou (2014) Strategic Orientation, Foreign Parent Control, and Differentiation Capability Building of International Joint Ventures in an Emerging Market. Journal of International Marketing: September 2014, Vol. 22, No. 3, pp. 3049. 1. Aliouche, H. E., & Schlentrich, U. A. (2011). Towards a strategic model of global franchise expansion. Journal of Retailing, 87 (3), 345-365 2. Alon, I. (2006). Global franchising and development in emerging and transitioning markets. Journal of Macromarketing, 24 (2), 156-167 Johanson, J and Vahlne, J. (1977), 'The Internationalization Process of the Firm - A Model of Knowledge

Development

and

Increasing

Foregin

International Business Studies, 8, (1), 25-34

27

Market

Commitments', Journal

of

Weekly meeting

21/02

28/02

07/03

14/03

21/03

28/03

Radh













Loredana













Natasa













Muna













Nadira













Key :  = Present X

= Absent

28

Team members names

Parts undertaken

Radh

The Company Internationalization Strategy

Introduction Internationalization Strategy Conclusion & Recommendations Proof reader

Loredana

Natasa

Introduction Internationalization Strategy Conclusion & Recommendations

Muna

The Company The Target Country Proof reader

Nadira

Introduction The Target Country

29