Investigation into Emerging Markets in South America

Furniture Retailer to the World

Alison Back Andrew Kuszczakowski Piero Sparapani

Introduction• Background & Context• Analysis• Recommendations• Action Plan

Current State• Sales of €23.8 billion in 2010• 700 million visitors annually• Business Model aims to provide quality

products at low cost– Flat-pack, self-assembly format– Self-serve, out-of-town stores with lots of parking – Labyrinthine store layout– Collaborative, long-term supplier relationships– Flat org structure

Context: Enterprise Value Determinants

Enterprise Valuation

Profitability

Reduce Costs

Add Value & Reduce Prices

Profit Growth

Sell More in Existing Markets

Enter New Markets

source: Hill (2011)

Entering New MarketsKey Market Entry Questions:

1. Market Entry Location – WHERE?2. Market Entry Timing – WHEN?3. Market Entry Strategy Selection – HOW?

Worldwide Operations316 stores in 39 countries

Market Entry Location (Where)South American Emerging Markets

Mic

ro-C

onte

xtM

acro

-Con

text

Market Entry Location - Determinants

Cost/Tax Factors

• Business start-up costs• Taxation complexity

Demand Factors

• Market size and growth• Market consumption

Regulatory Factors

• Level of protection for investors

• Contract enforceability

Socio-political Factors

• Country Risk• Level of perceived

corruption

adapted from: Shenkar & Luo (2004)

Location Determinants AnalysisCost/Tax Demand Regulatory Sociopolitical

Market Potential Index1 X X

Doing Business Ranking2 X X

IMF Forecast3 X

Country Credit Risk4 X

Human Development Index5 X

Corruption Perceptions Index6 X

1 Source: Michigan State University. globalEDGE MPI 2010. http://globaledge.msu.edu/resourcedesk/mpi/2 Source: The World Bank. Doing Business Raking 2010. http://www.doingbusiness.org/rankings3 Source: IMF. World Economic Outlook, Oct 2010. http://www.imf.org/external/pubs/ft/weo/2010/02/pdf/text.pdf4 Source: OECD. Country Credit Risk, Jan 2011. http://www.oecd.org/dataoecd/47/29/3782900.pdf5 Source: United Nations Development Programme. http://hdr.undp.org/en/media/HDR_2010_EN_Table1_reprint.pdf6 Source: Transparency International. http://www.transparency.org/policy_research/surveys_indices/cpi/2010/results

Market Entry – Location AnalysisWeight

Argentina

Brazil

Chile

Colombia

Peru

Venezuela

1. Acceptable (A), Unacceptable (U) Criteria

a.Member of WTO

b.Signatory to TRIPS

–

–

A

A

A

A

A

A

A

A

A

A

A

A

2. Return (higher number preferred) 50 18 11 20 15 18 15

3. Risk (lower number preferred) 50 28 25 15 27 19 35

OVERALL -10 -14 5 -12 -1 -20

adapted from: Daniels & Radebaugh (2001)

Location Comparison - ReturnRETURN – 2010/11 Weight Chile China

a. Market Size (current) 10 0 10

b. Market Growth Rate (current) 6 2 6

c. Market Growth Rate (2011 forecast) 8 5 8

d. Market Consumption Capacity (current) 8 2 5

e. Market Receptivity (current) 8 3 0

f. Tax Complexity 6 5 5

g. Business Start-up Costs 4 3 4

TOTAL 50 20 38

adapted from: Daniels & Radebaugh (2001)

Location Comparison - RiskRISK – 2010/11 Weight Chile China

a. Country Risk Rating 4 1 1

b. Level of Investor Protection 10 4 5

c. Corruption Perception Index 6 2 4

d. Contract Enforcement 10 3 3

e. Human Development Index 6 1 2

f. Country Credit Risk 4 1 1

g. Trading Across Borders 10 3 2

TOTAL 50 15 19

adapted from: Daniels & Radebaugh (2001)

Return vs Risk Trends

China

Ven

Peru

Col

Chile

Brazil

Argentina

2007 to 2010 Trends

Increased Opportunity of Re-turn

Incr

ease

d R

isk

Return-Risk

Neutra

lity

Market Entry Timing (When)Advantages Disadvantages

Early Mover

• Pre-empt rivals• Capture demand early• Ride the learning-curve ahead

of rivals• Ability to establish switching

costs

• Pioneering costs (learning the rules of the game)

• Changes to regulations may diminish early mover advantages

Late Mover

• Ability to observe and learn from early entrants’ mistakes

• “Free-rider” effects

• Risk entry into a market with established competitors

• Potential for higher barriers to entry

source: Lieberman & Montgomery (1987)

Early Mover Considerations• Supply chain • Availability of trained workers• Knowledge of customers• Organisational structure that supports growth• Cultural Differences and Implications

Cultural Dimensions Comparison

AustraliaChile

Individualism

MasculinityLong-termOrientation

Indulgence

UncertaintyAvoidance

Power Distance

source: Hofstede (2010)

Cultural Clusters

AUS

AUT

FIN

DEN

CZE

CHI

CAN

BEL

ISR

IRE

HUN

HOK

GRE

GBR

GERFRA

CHL

USA

TUR

TAI

SWI

SWE

SPA

SIN

RUS

ROMPOR

POL

NOR

NET

JPN

ITA

LOW

INDI

VIDU

ALCO

LLEC

TIVE

IND

IVID

UAL

ISM

POWER DISTANCE HIGH

source: Hofstede (2010)

International Strategy

Global Standardization

Strategy

Transnational Strategy

International Strategy

Localization Strategy

Low High

Low

Pres

sure

s fo

r Cos

t Red

uctio

nsH

igh

Pressures for Local Responsivenesssource: Hill (2011)

Market Entry Strategy Selection (How)

Options Implications for IKEA

Direct Export to Retailer

• Contrary to successful Business Model• Free Trade Opportunities – MERCOSUR/Andean Agreement• Low cost of entry in to markets

Licensing Brand to Investors

• Contrary to successful Business Model• Loss of control - Brand Risk• Low Investment Risk

Joint venture with local investor

• Reduced Decision Making control - Strategic Risk• Utilisation of Joint Venturers Local Knowledge

Market Entry Strategy Selection (How)

Options Implications for IKEA

Wholly Owned Subsidiary

• Supply Chain• Political Risk – Nationalisation• Investment Risk – high costs of setup• 100% Profit Returns• Total Control - Lower Brand Risk

Franchising

• Supply Chain• Lower profits than Wholly Owned Subsidiary• Full Control of Strategy and Brand• Low Investment Risk• Franchisee Local Knowledge

Summary of Recommendations• Where: Chile• When: Early (First-mover)• How: Transnational Strategy

Franchisee arrangement

Action PlanAction Timeframe Objective Action

1 Immediately

To determine Chile’s readiness for IKEA and the need for local customisation

Engage a team to undertake micro-level analysis of the Chile market, business conditions and the retail furniture market in Chile

To determine the suitability and availability of supply-chain partners

To understand the potential for franchisees arrangements in Chile

2 Immediately

To understand the cultural implications on organisational structure design

Engage a team to investigate the lessons learnt from the recent store opening in Lisbon, Portugal (May 2010)

To leverage corporate knowledge and ‘lessons-learnt’ from experiences in similar markets

Conclusion• In the South American context, Chile is the

preferred destination for investment• However, further investigation must be

undertaken before an investment decision can be made. This will also confirm whether our proposals in relation to WHEN and HOW are correct

• The option to invest in Chile also needs to be considered in light of opportunities in other regions under investigation

Questions?

ReferencesBush, J 2009, Why IKEA is Fed Up with Russia, viewed 28 February 2011, <

http://www.businessweek.com/magazine/content/09_28/b4139033326721.htm>.Doz, Y & Prahalad, C 1984, 'Patterns of Strategic Control within MNCs', Journal of International Business Studies, vol 15, no. 2, pp. 55-72.Hill, C 2011, International Business: Competing in the Global Marketplace, 8th edn, McGraw-Hill, New York, USA.Hofstede, G 2010, Hofstede Dimension Data Matrix, viewed 19 February 2011, <

http://www.geerthofstede.com/media/651/6%20dimensions%20for%20website.xls>.Inter IKEA Systems 2010a, IKEA - Facts & Figures, viewed 12 February 2011, <

http://www.ikea.com/ms/en_US/about_ikea/facts_and_figures/index.html>.Inter IKEA Systems 2010b, IKEA | Our business idea, viewed 22 March 2011, <

http://www.ikea.com/ms/en_US/about_ikea/the_ikea_way/our_business_idea/index.html>.Inter IKEA Systems 2010c, Inter IKEA Systems B.V. - Facts & Figures, viewed 14 February 2011, <

http://franchisor.ikea.com/showContent.asp?swfId=facts1>.Inter IKEA Systems 2010d, Welcome to IKEA.com, viewed 14 February 2011, <http://www.ikea.com/>.International Monetary Fund 2007, World Economic Outlook - Globalization and Inequality, viewed 22 February 2011, <

http://www.imf.org/external/pubs/ft/weo/2007/02/pdf/text.pdf>.International Monetary Fund 2010, World Economic Outlook - Recovery, Risk and Rebalancing, viewed 22 February 2011, <

http://www.imf.org/external/pubs/ft/weo/2010/02/pdf/text.pdf>.Johanson, J & Vahlne, J-E 1977, 'The Internationalization Process of the Firm - A Model of Knowledge Development and Increasing Foregin

Market Commitments', Journal of International Business Studies, vol 8, no. 1, pp. 25-34.Lieberman, MB & Montgomery, DB 1988, 'First-Mover Advantages', Strategic Management Journal, vol 9, pp. 41-58.Michigan State University 2011, Market Potential Index for Emerging Markets, viewed 19 February 2011, <

http://globaledge.msu.edu/resourcedesk/mpi/>.OECD 2010, Historical Country Risk Classification, viewed 19 February 2011, <http://www.oecd.org/dataoecd/9/12/35483246.pdf>.Porter, M 1990, 'The Competitive Advantage of Nations', Harvard Business Review, vol 68, no. 2, pp. 73-93.Shenkar, O & Luo, Y 2004, International Business, John Wiley & Sons, USA.

ReferencesThe Economist Intelligence Unit 2008, EIU country analysis & forecasts: Country Reports, viewed 20 February 2011, <

http://countryanalysis.eiu.com/country_reports.html>.The World Bank 2011, Historical Data - Doing Business - World Bank Group, viewed 19 February 2011, <

http://www.doingbusiness.org/custom-query>.Transparency International 2010, Surveys and Indices - Corruption Perceptions Index, viewed 19 February 2011, <

http://www.transparency.org/policy_research/surveys_indices/cpi>.United Nations Development Programme 2010, International Human Development Indicators - UNDP, viewed 19 February 2011, <

http://hdrstats.undp.org/en/indicators/49806.html>.Waldmeir, P 2010, China push gives Tesco the edge, viewed 26 February 2011, <

http://www.ft.com/cms/s/0/3cd96108-fe51-11de-9340-00144feab49a.html#axzz1HEX4Cmag>.Wijers-Hasegawa, Y 2006, Sweden's IKEA back in Japan after 20-year hiatus, viewed 26 February 2011, <

http://search.japantimes.co.jp/cgi-bin/nb20060425a1.html>.Wikipedia 2011, List of parties to international copyright agreements, viewed 19 February 2011, <

http://en.wikipedia.org/wiki/List_of_parties_to_international_copyright_agreements>.World Trade Organization n.d., WTO | GATT members, viewed 19 February 2011, <http://www.wto.org/english/thewto_e/gattmem_e.htm>.