Global Markets and Entry strategies – IKEA entry to Nigeria

Introduction

Jones (2016) explained that internationalization is a process which involves an outward movement in operations of an organisation. In other word, it is concerned with the increased involvement of the company in international operation for both inward and outward goods and services.

Internationalization is dependent on a range of factors such as sales objectives, the capacity of the organisation, target markets as well as personnel. When an organisation has resources to expand but unable to expand in the domestic market, then they look for international markets (Bishop et al., 2014).

Thompson and Martin (2015) added that the motivation behind the internationalization is an expansion of business to achieve growth and sustainability. The success of internationalization is dependent upon the resources, skills and economic opportunities available to a company. At last, not least, company can decide how much resources, time and effort it wants to deploy for its global operations. The range of option available could be large capital investment in terms of equity investment or limited resources deployment through non-equity method (Turner, 2014).

Aim of this report

In this report, IKEA internationalization experience is evaluated by providing a personal reflection on analytic research carried out to identify and develop entry strategy for the company in Nigeria. Moreover, a range of factors, such as company rational and readiness for internationalization, challenges surround the entry strategy, market screening, and analysis, the value of export-import strategy, as well as performance scenario for company, is evaluated.

Analytic Research Process and Personal Reflection

IKEA Profile

The vision of the company is ‘to create a better everyday life for many people’. The company believe in providing quality and design for home furnishing products at affordable prices. The company is highly focused on value chain have more than 1080 suppliers in 53 countries. The company sell a wide range of home furnishing products such as lighting, metal, furniture and textile in order to create a better living environment.

The company have annual revenue of more than 27 billion euro and have a product range of 9500 products. Moreover, internationalization experience of the company involves having operations in more than 46 countries having 351 stores. In addition, out of these 298 stores, 227 are present in Europe, 49 in US, 17 in Asia and 5 stores in Australia (IKEA, 2015).

Company situation Analysis

The first step involved in carrying out the analytical research was conducting a situation analysis. In order to conduct analysis, a range of processes, methodologies and strategy of the organisation is analysed. In addition, products and industry lifecycle analysis were carried out to identify and understand the current position of the company. The financial information of the company shows that the company have continued increasing sales revenues. The revenues of the company were 21 billion in 2008 which rose to 27 billion euro in 2012.

The company has pursued organic growth strategy to achieve sustainable future growth. The three key focuses for company are low prices, people development and socially responsible practices (IKEA, 2015).

The product portfolio analysis shows that the company have a wide range of products for bedrooms, kitchen, store, home and office, living and dining room as well as it sells outdoor products. The product life analysis shows that company products are standardized and short life span because of style and demand. Once the product is launched it quickly goes towards maturity phased as people are inclined to the new design. The product portfolio and lifecycle analysis helped to understand the company offering and value perceived by the customer.

Moreover, the company have Hugh exposure in international markets with a presence in 55 countries. This marks that company is well versed with internationalisation and have resources along with skills to enter the new market (Orcullo, 2016).

Furthermore, analysis of strategy and operations has highlighted current practise at IKEA. The company have most of the manufacturing facilities based in Europe but and prefer to purchase material locally based on long-term cooperation.  In addition, distribution facilities are based in Sweden and works on the principle of large volume and lowest package in order to keep the price to a minimum.

It is evident from current practices that the company have internationalization experience. The company have operations in 55 countries; operate through franchise as well as it has 131,000 employees globally (Thompson and Martin, 2015).

At last, not least, SWOT analysis helped to understand strength, weakness, opportunities, as well as threats.  This helped to understand current strategic priorities, resources, strengths, as well as opportunities available for the company.

The strengths of the company highlighted during the research were strong brand name as well as a diversified portfolio. The weakness involves standard products; threats are growing competition along opportunities to grow further in developing markets (Bensoussan and Fleisher, 2012).

Situation analysis and internationalization

The situation analysis helped to understand the company strategy, operations, strengths as well as opportunities which have helped to develop a response to internationalization. The factors such strong competition and lack of presence in emerging markets present an opportunity for the company to grow. Company strategy highlights an organic approach to growth as well as export-based internationalization for many markets. Therefore, situation analysis helps, to summarize, current practices and potential to handle future business proposals.

Global Market Screening

Market selection factors – Initial Screening

Once the current strategic position and strategies of the company were understood, the section helped to screen the potential target markets. The selected were based on economic, social and geographical attractiveness. IKEA have enriched experience in internationalization because of its presence in large of countries around the world.

IKEA have a presence in the most of developed European markets i.e. emerging and developing markets were selected. This helps to diversify the revenues base, as well as entry the new markets. The range of markets selected was India, Croatia, Serbia and Nigeria. The markets represent business opportunity based on their economic growth and developing infrastructure (Hollensen, 2016).

Cook, Alston and Raia (2016) stated that global marketing screening helped to determine the suitability of selected markets in terms of business potential. The global screen process helped to analyse the macro and micro factors in these markets. The mix of micro and macro variables helped to develop the country profile. The macro analysis highlighted taxation, infrastructure, GDP and population in the target market. This helps to determine the financial outcome from each market.

The factors such as income, economic growth rate, and social demographic were examined during the marketing screening stage. For example, market screening showed that India GDP growth rate in all the selected market was 5%. However, Croatia had high unemployment whereas Portugal has lowest inflation. Nevertheless, it was evident that Nigeria has highest per capita income of 2400 along with GDP rate of 3 % which is highest in the region (Musgrave and Kacapyr, 2014).

In-depth Market Analysis

This stage helped to conduct detail analysis on the chosen market. The initial screening helped to develop the country profile based on micro and macro factors to determine the economic and social factors. However, detail analysis helped to narrow the research to market which were Nigeria and India.

After the selection, this stage allowed us to developed detail profile of selected country. Moreover, research was carried to collected information on social, political, economic and technological factors in the available market. At this stage, the potential sales opportunities, market share as well as the competitive landscape was examined in the country (Bishop et al., 2014).

Entry condition, distribution channels and competitive landscape

Luo (2015) discussed that the in-depth analysis helped to access the market entry condition in both markets. The range factors chosen to analyse the market condition were population, the rate of interest, inflation and GDP growth rate, the rate of unemployment as well as household income. Moreover, the competitive landscape was examined in two countries to examine potential market share and possible market sales in each of selected market.

The next factor examined was the availability of infrastructure in the selected market. It was evident that Nigeria has much improved and strong infrastructure compare to India. This makes Nigeria more suitable place to develop a robust distribution network (Pride and Ferrell, 2012).

Entry Strategy and Marketing Plan

Rational for Nigeria Selection

After conducting in market screening and in-depth analysis, the market selected to enter was Nigeria. The number of factors associated with Nigerian market was demand for products, government support for manufacturer, political stability and minimum bureaucracy, large inflow of foreign direct investment (FDI) as diverse population with high per capita income compare to India. The per capita income in Nigeria is $2300 compare to $1200 per capita income in India (Turner, 2014).

The country has a strong infrastructure and better technology deployment. Another prominent factor which influences the decision was limited competition in the market and company can take first mover advantage. Nigeria economic potential is huge and it is estimated it will become a member of G20 by 2050. This represents stronger demand for the company product especially among the middle and upper class who value the imported and high-quality product.

At this stage, different models entry methods are examined which include joint venture, licensing as well as exporting. The selected strategy for Nigeria market is a direct method of export. This helps to eliminate the cost of an intermediary as well as helps the company to understand the market (Dlabay and Scott, 2014).

The benefits achieved from direct exporting include better control of the market along with pricing. Moreover, direct exporting helps to build better relation with the customers. This stage helped to devise the market plan based on the strategic, economic and social information gathered in the Nigerian market.

Therefore, the marketing mix design at this stage included low price, place include luxury retail stores; promotion element advertising and product initially launched will include home furniture and articles of daily use (Hollensen, 2015).

Business and strategy Risk

Dlabay and Scott (2015) discussed that the range of risk associated with global operation includes political conditions in developing markets, foreign exchange risk, cultural and credit risk. The direct exporting involves high product risk, inventory risk as well as control risk. The Nigeria market is very diverse and there might cultural or even religious present in the market. Organisational cultural issues along with customization of the product according to local culture and market may require attention before product launch.

Rationale for the specific internationalization modality

Export-Import Strategy

When a company enters into foreign market through rational planning, then it requires an effective strategy to support the marketing of the company. Therefore, when company selling goods to international markets, then it needs strategy for export to enhance its competitive advantage and reduce costs. Therefore, organization exporting strategy plays an important role in the success of organization in foreign market.

The cost saving can be transfer to customers through developing an effective marketing mix for different market segments. Nevertheless, according to porter 1985, companies who have effective marketing strategy have likely to outperform companies with less effective marketing strategies (Jones, 2014).

The development of export strategies involve careful planning for the exports. There are two types of export-import strategies a firm can follow which are either direct or indirect exports. In case of direct export, range of distribution channels is selected from independent exporters. On the other hand, in case of direct exports firm deploy own distribution channels.

The export strategy of firm is based on number of factors are product adaption and dimensions of the product. In order to perform successful in the market, a company product adapted to local regulations, market taste and characteristic as well as regulation of government. The product adaption provides an opportunity to get adapted according to taste of customer (Thompson and Martin, 2016).

Imports/Exports Procedures flowchart

The successful exporter gets adapted to requirement of the local market and integrates local market and requirements in their products. The second important characteristic is structure of the export channel. The range of factors such as contacts, relationship and mode of transport plans an important role in the success of exporter in foreign market. The range of other issues involves distribution channels in the country along with resources availability and relationship with intermediary (Bensoussan and Fleisher, 2012).

Therefore, companies who have effective export structure have their own distribution channels, product adaption as well as strong relationship with intermediaries. The diagram below shows typical export process (Capela, 2012).

Another important issue to manage is price of the product in the foreign market. Companies who maintain competitive advantages and offer products at better pricing manage to earn better return in compare to their counterparts. There are number of factors which an exporting firm should manage which are taste and preference of the customer in the target market. There is stronger relationship between the offering of the company and its relevance to market share.

Nevertheless, in case of IKEA it prefers to adopt direct marketing strategy. Therefore, it needs to get its product adapted to local market need as well as offer price which are competitive. Company fails to consider the taste and preference of the local customer or unable to develop relation with local stakeholders, then might not be success. The adaptation of direct exporting method involves high cost and company will have risk in the starting years (Turner, 2014).

Import strategy

Import involves procuring products which are not available locally. The import process work on need recognition model which start with requirement of the company. This involves finding an international supplier for required product. Moreover, one the supplier is identified quotations is seek to evaluate the best alternatives for the company. Import work in reserve of the export and rather selling company search the required products in the international market. Nevertheless, import also has risk and bound to custom duties, taxes as well as regulations (IBP, 2015).

Imports/Exports Procedures flowchart

Risk of import and export

There are wide range of risk faced by both importer and exporter in the international market. An export has a risk of credit default, product and inventory risk, foreign exchange risk as well as cultural risk. For example, when supplier received payment their might major changes in the currency value. Nevertheless, this type of risk mitigated through hedging. Moreover, other factor to consider from importer perspective is credit risk in case supplier asks for advance payment, product quality risk, legal issues as well as availability of product is risk. The range of factors attached to export and import include rates and tariff, codes as well as custom and international law (Bishop et al., 2014).

Documents in export-import operations

Incoterms -2010

The export-import is managed through incoterms 2010 which define the shipment and trade for international commercial transactions. Incoterms explain the transport and custom regulation which enclosed range of factors such as Ex-work and carriage paid to (CPT) for airways and for sea route it defines freight on board (FOB) and Cost, freight and insurance (CIF) for transportation. Moreover, it explains the procedure on LC and other operational issues.

Commercial Documentations

Transportation DocumentsFinancial Documentation

Documents

QuotationsBill of LadingDocumentary credit (LC)Certificate of Origin (COO)
Contracts and Performa invoicesAirway billBill of Exchange (B/E)Declarations
Commercial invoicesGuaranteeCustom Invoice
Packing ListPacking listCertificate
Insurance documents

Tax and custom duties

Tax and duties are part of export and import procedure one goods reach the port of importer. Duties and tariffs are imposed by the government on the goods imported and usually have much higher rate for luxury items or no tax on items which consider important for welfare of general public. The H.S code determined the rate of obligation on certain item. When the code focus, calendars are utilized to recognize the rate and duty connected to item. The taxes and charges are fluctuated is based on government and are charged notwithstanding the custom duty (customs.go.th, 2016).

Method of payment

There are four methods which are commonly used as method payment in international transaction. The first wide used method is letter of credit (LC) and it’s most secure type of payment in any form of international transaction. LC is commitment by the purchase bank on its behalf to make a payment upon delivery of goods. The next method of payment includes cash in advance and it involves upfront payment for goods and services before goods dispatch to customers.

The cash in advance is most risky method for importer as there might chance exporter does not receive goods. The other two methods are documentary credit where payments are made before the goods. Documentary is most secure for exporter whereas open account is risker for exporter (Venedikian and Warfield, 2016).

Payment Methods in Export and Import

Conclusion

The analytical research shows that IKEA have strong internationalization exposure and have operation in more than 55 countries. The situation analysis helped to understand the company current strategic position. This has helped to develop an understanding on processes, procedure and strategy of the company. The market screening helped to identify potential market where company a make entry for start it business. The in-depth analysis has helped to examine detail economic, social and political factors in each of the market.

Nevertheless, in-death narrows the market selection which helped to select the market for IKEA. The detail methodology has highlighted social, demographic, as economic factor.  Nigeria as new potential market is more suitable in terms of sales, financial benefits for the company. In the end, importance of export-import strategy as well as procedure, documentation, duties and taxes were discussed to provide better insight on export-import procedure.

 

 

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