Global Immersion Project

Group Italy
Batch36
Global Immersion Project

Names of Team members Company Name Designation

Delzin Irani Constellation Marine Services Captain
Silvia Thomas Padiyath MakersBuilders Child Skill Development Education Consultant
Vineet Pandey Etisalat Software Consultant

1. PESTLE Analysis of the Country chosen in brief -

We chose China as our country as it has one of the biggest market in the world, with a whopping population of
1.357 billion. We as a group believe and think that Chinese market has a lot of potential and with that many
challenges that a company could face. Below is our PESTLE analysis of the country.
Political: Government Regulations and Legal Issues have always been a concern for foreign companies in
China. Chinese are known for being very strict about regulating industries in the country. Most of the existing
companies be it in any industry hesitate to take any trade actions or voice their concerns, in the fear of Chinese
governments retaliation. Even the embassies are comparatively powerless, when it comes to Chinese
Government. This is definitely a big challenge for companies for trading in Chinese markets. [1]
Economic: Economic Development directly affects a companys growth in that market. As per latest quarter
of 2016, china has a 6% growth in its GDP, driven by fast industrial output, retail sales and new loans and fixed
asset investment eased. [2] The data indicates that with time, China will surpass USAs GDP soon. The only
concern could be the high inflation rate of 1.9% of which non-food cost rose by 1.6% and food cost raised by
3.2%. [3]
Social: Chinese have a very strong closed culture and many of them cannot speak English. However, Chinese
consumers behavior are changing with time. According to Boston Consulting Group [4], there are 420 million
internet users and they often shop online. People tend to spend a lot of money on online shopping and the
brick and mortar shopping is reducing drastically in China.
Technology: Surprisingly, only 1 percent of credit card penetration has happened in China. People prefer to
pay by cash, even if online shopping is widely accepted. However, one of Chinas goal is to become a global
leader in technology, a far-fetched dream from its current position as a labor intensive manufacturer. [5]
Legal: China is moving from being the factory of the world to a growing economy. Hence their legal laws to
starting business in China is quiet relaxed. Getting a trade license and a retail space is not legally hard.
However, the cost of acquiring a retail space in Tier 1 cities like Shanghai and Beijing are extremely high, that
most companies actually run into loss. Most of the money lies in Tier 2 and 3 cities. Tier one cities as spoilt
with options for customers and hence many have their shops just as a marketing gimmick and write off the
losses as marketing expense. China has heavy import taxes as well that has hit Ikea in the past. Ikea has
resorted to produce their good locally in China to avoid import taxes.
Environmental: China has a huge population and hence there has always been environmental concerns in
China, the highest being Water and Air pollution. In the recent years, China has changed its model of
economic growth at any cost to a sustainable one. On January 2015, China revised it Environmental law
aggressively that affected many businesses. Businesses had to take permission for emission and reveal their
emission data. There was a limit placed on each company and if violated huge fines were imposed and
Directors could face criminal charges. On the other hand, the government rewarded companies who adopted
a sustainable strategy. [6]

2. Application of Porters five forces framework to the Industry in brief.

Thereat of new Entrants: Since IKEA entered the Chinese market back in 1998, through the support from joint
venture as required by China retail policy, its highly efficient procurement activities established its base.
However, IKEA is facing threats from new entrants in China slowly emerging over time. IKEA is facing severe
competition from established global brands such as Home Depot, B&Q etc. However, keeping in view Chinas
stringent rules and regulation, threat of new entrant is quite low and not as rapid as it could have been if a
 lenient government was in place.
Bargaining Power of Supplier: Comparatively to the entire Chinese market Suppliers availability, bargaining
power of suppliers is low in case of Ikea. If a supplier fails to suffice their requirement, Ikea always has options
as numerous other suppliers always stand by doors with better commitment. Therefore, IKEA always have
options to pressurize suppliers for high quality but at a lower price. Of all the 53 countries of IKEAs presence,
Ikea has about 1300 suppliers in Europe (64%), North America 3% and Asia (33%) of which China alone
comprises 21% (IKEA 2009).
Bargaining power of buyer: Chinese consumers always demand high quality and service but at the same time
not willing to pay a large sum for the same. As most of the previous Ikeas suppliers collaborate and jumping
on the ecommerce channels providing same quality at a better price, the bargaining power of buyers is very
high in China, Chinese consumers have greater opportunities to purchase from others and other alternatives
providing greater choice.
Threat of substitute product: Threat of substitutes is very high specifically in Chinese market because of
lacking intellectual property laws; any of the local producers can copy IKEAs product design and quality. Such
as Kunming, a Chinese retailer has been copying IKEAs version for quite a long time. To avoid such clashes,
IKEA should continuously update their concepts for trend, keep it updated, and follow new design and style.
Threat of Rivalry/Competition: The furniture industry in China is very competitive in presence of big names
such as Howdens Joinery (formerly Galiform plc) of England, Wal-Mart from USA and rising local competitors.
However, there are also some foreign companies already having presence in China such as B&Q, Metro and
Decathlon. IKEA is also facing tough online competition from multiple local retailers such as Taobao offering
similar designs at a much lower costs.

3. TOWS Matrix & Analysis for the company.

THREATS OPPORTUNITIES
o Chinese Government Rulings o Growing Middle Class
o Brand Piracy o Expansion to Tier 2 and 3 cities
o Time zone issues
WEAKNESSES STRENGTHS
o Shaky relationship with Chinese Suppliers o Brand perception and image
o Goods Delivery system o Quick adaption to Chinese customer behavior
o Language barrier/constraints o Global exposure and experience
o Strong business model and finance

Threats: Chinese government have been scrutinizing companies that do not comply by their law. Even a
slightest of mistake, could drive the company out of China as the punishments are harsh. Chinese are known
for faking not just goods, but also services. After Apple store concept was copied in China, Ikea store concept
was also copied. From the blue and yellow color to the cafeteria concept. This is a threat to Ikeas brand image
and losing customers. The fake stores are being placed strategically far from the real Ikea, mainly in tier 2 and
3 cities. This is a future threat to the company. [7]
Opportunities: Chinas middle class sector is exploding. According to the consulting firm Mckinsey and
Company, 76% of Chinese urban population will be from the middle class by the year 2022. In 2000, it was
just 4% of the urban population. [8] Ikea being a budget product company should target the middle class
segment of customers and therefore this is a great opportunity for Ikea. Ikea as of January 2017 has 19 stores
all through China including Tier2 and Tier3. Should Ikea stop or should they open more stores?
Weaknesses: Ikea recently terminated many contracts with Chinese suppliers. In China, the OEM (original
equipment manufacturers) market has been going through a downfall. Raw material prices increased and
these manufacturers could not afford cheap labor due to the increasing cost. Eventually they had to increase
their selling price. Ikea being a Cost Leadership company could not accept this price rise and hence terminated
 the contracts with them. Many Chinese OEM survived with the help of Ikea and now they were running in
loss. This gave a bad image to Ikea amongst the local suppliers. Ikea is still far away from the major population
in China. Ikea has to make sure speedy delivery of their goods to customers and expand its reach to all the
parts of the country. One of the biggest barriers to communication is the Chinese local language, which has
to be learnt in order to progress.
Strengths: Ikea being a global leader in home furnishing industry definitely has a competitive advantage in
China. They have managed to maintain the quality of the Ikea concept in China and hence no customers ever
doubt the value Ikea offers. Ikea in China is famous for allowing its customers use their products in the store.
Many Chinese customers come and spent either the whole day in Ikea, sleeping or just relaxing. In other parts
of the world, this would not have been accepted. However, Ikea allowed this because they understood
Chinese customer behavior and adapted to it.

4. Strategies considered for building and sustaining competitive advantage in brief.

Ikea though considered as a leading low cost retailer, its price compared to Chinese local market is still high.
To keep Cost leadership tag intact, Ikea need to keep its pricing low.
China comprises of different customer segment and Differentiation is the key factor, which Ikea should keep
in mind. It should focus on Innovation, R&D and fulfilling differing needs of its target customer. However, at
the same time should keep track of its cost.
They should focus more on Expansion, targeting second tier cities like Hangzhou and Chongqing to reach out
to further masses.

5. Name of the persons proposed to be interviewed (Industry expert, Members of Association, Companys
management, Governments officials, Ministry of Economy etc.).

Linda Xu: IKEA China Corporate PR manager

Kelly Shen: MSL PR Executive. MSL China is the PR agency for IKEA in China
Bruce: Levia China, Ikea supplier

6. State the reason for choice.

IKEA aspire to be renowned as a green company by aiming to use renewable energy. In addition, companies
like Ikea constantly undergo audits assessing their contribution towards community development in areas like
forestry, carbon-emission control and other conducts. Ikeas green initiative will definitely contribute
business success and sustainability
Works Cited

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1 http://www.scmp.com/news/china/diplomacy-defence/article/1940397/china-making-life-difficult-foreign-
] companies. [Accessed 13 October 2016].

[ Trading Economics, "China GDP Annual Growth Rate," 15 July 2016. [Online]. Available:
2 http://www.tradingeconomics.com/china/gdp-growth-annual. [Accessed 13 October 2016].
]

[ N. B. o. S. o. China, "Inflation Rate," National Bureau of Statistics of China.

3
]

[ Boston Group Consulting, "The Chinese Digital Consumer in a Multichannel World," 17 April 2014. [Online].
4 Available:
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[ World Economic Forum, "Explainer: China as a world leader in technology," 8 September 2015. [Online].
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] [Accessed 13 October 2016].

[ A. Zhang, "https://www.linkedin.com/pulse/chinas-new-environmental-law-its-impacts-mncs-china-allan-
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[ D. M. Reporter, "http://www.dailymail.co.uk/news/article-2021607/First-fake-Apple-stores-China-fake-Ikea-
7 shop-Kunming.html," 2nd August 2011. [Online]. Available: http://www.dailymail.co.uk/news/article-
] 2021607/First-fake-Apple-stores-China-fake-Ikea-shop-Kunming.html. [Accessed 11 January 2017].

[ T. P. Kim Iskyan, "http://www.businessinsider.com/chinas-middle-class-is-exploding-2016-8," 26 August 2016.

8 [Online]. Available: http://www.businessinsider.com/chinas-middle-class-is-exploding-2016-8. [Accessed 11
] January 2017].