PESTEL ANALYSIS OF IKEA ENTERING INTO INDIAN MARKET

POLITICAL FACTORS
Political factors are how and to what degree a government intervenes in the economy,
it includes

 Constitutional System
 Stability of Government
 Business Freedom
 Trade Freedom
 Tax Policy

The decision of Swedish retailer IKEA, the world's largest furniture maker, to invest
Rs 10,500 crore in India will send a positive signal to other investors who have turned
hesitant in view of the UPA government's policy drift on foreign direct investment.
India is in desperate need for such FDI which will bring modern technology. Ikea's
decision to enter India comes on the heels of the Indian government's decision to relax
the rules on single brand foreign retailers in the country. Ikea will now have to source
at least 30% of its production from the Indian market.
Foreign direct investment in supermarkets has hit a political hurdle as it is seen as a
threat to owners of local mom and pop stores which account for roughly 90 per cent
of India's $450 billion retail sector.
The fact that the more progressive agricultural states such as Punjab and Maharashtra
are in favour of FDI in retail stems from the fact that modern storage facilities will
ensure better prices for farmers who are currently at the mercy of middlemen. India
offers IKEA a huge new market while the government is battling heavy criticism over
its management of Asia's third-largest economy where growth has slipped to its
weakest pace in nine years.
India has rebuffed a request by IKEA to relax rules on buying goods locally,raising
the prospect of a delay in the world's largest furniture maker entering theIndian retail
market.

ECONOMIC FACTORS:

 Economic factors include

 Economic Growth
 Exchange Rates
 GDP Growth
 Globalisation
 Interest Rates
 Inflation Rate (cost of capital)
 Labour Costs
 Unemployment Rate
IKEA's low prices create appeal amongst its customers in tough financial times. It
isvital to keep prices as low as possible when the retail sector is depressed. IKEA's
pricing strategy targets consumers with limited financial resources. Its products will
also appeal to those with higher budgets through good quality and design. The
company must ensure that itis always recognised as having the lowest prices on the
market in the future.

The fluctuating commodity and raw material prices in INDIA result in rising
purchasing costs for IKEA. This will have an impact on the margins of the
organization and might lead to passing over the cost to consumers by increasing
prices of most things in the supermarket. Furthermore, rising fuel costs will have
implications right throughout the supply chain of IKEA leading to an overall situation
of increasing prices, resulting in decreased competitiveness. The credit crunch can
impact IKEA negatively as it might decrease the purchasing power of consumers and
though they will still buy the essentials they may be more cautious. Furthermore,
furniture, unlike fast moving consumer goods, are durable and can last for several
years and in such economic uncertainty. Consumers may be reluctant to change what
they perceive to be still serviceable sets. They may also spend less on luxury items,
something that has a greater profit margin for IKEA. All this may result in lowered
sales and thus, reduced margins for the firm .At the same time, IKEA may also face
stiffer competition from local small retailers who offer furniture at more affordable
prices- something which will appeal to cost conscious consumers. This may cause
IKEA to reduce its margins, affecting profitability.

SOCIAL FACTORS:

 Population Growth Rate

 Age Distribution
 Perception of Safety.
 Educational Infrastructure
 Employment Patterns
 Cultural Taboos
As Ikea forays into the lesser tap markets of India, social factors may also come
into play. Asian societies are generally more savers than spenders and in such
economic certainty, Asian consumers may be unwilling to spend on new furniture,
preferring to save for a rainyday. At the same time, the more affluent consumers who
are able to spend may be unwilling to buy products from Ikea which has a reputation
of requiring self-assembly.

TECHNOLOGICAL FACTORS

Technological factors include technological aspects such as R&D activity,

automation, technology incentives and the rate of technological change. They can
determine barriers to entry, minimum efficient production level and influence
outsourcing decisions. Furthermore, technological shifts can affect costs, quality, and
lead to innovation.
  Emerging Technologies
 Impact of Internet, Reduced Communication Costs
 Rate of Technological Change
 R&D Activity (SEZs)
 Technology Incentives
 Technology Transfer

RFID (Radio Frequency Identification Device) technology can be used for significant
benefits to the supply chain of IKEA. If adopted, this technology will lead to
less inventory for the supermarket firms resulting in lower cost for the company
which could translate into cheaper prices.

The IKEA used quality technology and systems to promote the shorter queues, proper
scheduling, tracking and trading patterns, and staffing. It aims to be more productive
and establish employee preferences. The system made the IKEA in
a position to ensure the right number of staff in a right place and in a right time tomatc
h the unique trading pattern s at each stores of IKEA. The company view in
optimizing everything from the supply chain is also optimizing and managing the
workforce to create an efficient store environment and keep customers happy

ENVIRONMENTAL FACTORS

Environmental factors include ecological and environmental aspects such as weather,

climate, and climate change, which may especially affect industries such as tourism,
farming, and insurance. Furthermore, growing awareness of the potential impacts of
climate change is affecting how companies operate and the products they offer, both
creating new markets and diminishing or destroying existing ones.

The government takes serious matter on protecting the environment where they
impose many regulations and laws in protecting, preventing and controlling industrial
pollution and improving urban environment. The government also
collaborate with many NGO’s in order to maintain the
Mother Nature

India is the second most populated country in the world with about 1.2 billion
inhabitants. Ports, Airports and a sufficient railway system are the basis for the
countries decent infrastructure. Additionally, India is the largest democracy in the
world and has a very stable political.

Although, India ranks 122nd in the world when it comes to the ease of
doing business, one can say that the general economic environment is favourable for
IKEA. There has been constant GDP growth in the last couple of years and the Indian
rupeeis relatively stable as well.
India’s society has been influenced by a very strong caste system in the past
which prevented many people from freely choosing what work or business to enter.
This has changed and urban regions tend to be more liberal concerning initial cast
affiliation than the rural areas. As far as the technological environment is concerned,
India’s population is increasingly connected to the Internet but still behind in the
international comparison. The Indian climate is quiet diverse due to the country’s
enormous size. As there are colder and warmer regions, the consumption
behaviour can differ on a regional level due to the diverse climate. Environmental -
With regards to the environmental factors such as the air, noise, and water,
inspections are implemented to ensure the company provides corrective actions within
the stipulated time. The environmental inspection is part of the legal documentation
and environmental authorities as the business operations are on-goings and maintains
the competence.

LEGAL FACTORS

 Consumer Law

 Discrimination Law

 Employment Law

Health and Safety Laws legal compliance of IKEA is strictly implemented with the
relevant and applicable laws and regulations that pertain to the environment, social
and working conditions. The company also scheduled the most demanding
requirements to be specific in maintaining the list of laws and regulations and with the
procedures.

1. Legal

Suppliers must comply with national laws and regulations and with international
conventions concerning the protection of the environment, working conditions and
regarding child labour.

2. Working conditions

IKEA expects its suppliers to respect fundamental human rights, and to treat
their workforce fairly and with respect.

Suppliers must:

•Provide a healthy and safe working environment;

•Pay the legal minimum wage or the local industry standard and compensate
for overtime;
•If housing facilities are provided, ensure reasonable privacy, quietness and personal
hygiene

Suppliers must not:

•Make use of child labour.

•Make use of forced or bonded labour.
•Use illegal overtime.
•Accept any form of mental or physical disciplinary action, including harassment.

3. Environment and forestry

At IKEA, we shall always strive to minimize any possible damaging effects to the
environment, which may result as a consequence of our activities. Therefore, IKEA
and its suppliers shall continuously reduce the environmental impacts of operations.

Suppliers must:

•Reduce waste and emissions to air, ground and water;

•Contribute to the recycling of materials and used products

Suppliers must not:

•Use or exceed the use of substances forbidden or restricted in the IKEA list of 'Chem
ical Compounds and Substances';

•Use wood originating from national parks, nature reserves, intact natural forests
or any areas with officially declared high conservation values, unless certified

IKEA Porter’s Five Forces Analysis

Rivalry among existing firms

It is intense in the global market of discount furniture and the major players in the
industry include Euromarket Designs Inc, Galiform plc, Wal-Mart Stores Inc, Argos
and others. However, currently IKEA is the undisputed market leader in the industry
of discounted furniture in the global scale.

Threats of New entrants to an industry can raise the level of competition, thereby
reducing its attractiveness. The threat of new entrants largely depends on the barriers
to entry. High entry barriers exist in some industries. whereas other industries are very
easy to enter. Key barriers to entry include Economies of scale- Capital / investment
requirements- Customer switching costs- Access to industry distribution channels-
The likelihood of retaliation from existing industry players.

Threat of Substitutes
The presence of substitute products can lower industry attractiveness and profitability
because they limit price levels. The threat of substitute products depends on:- Buyers'
willingness to substitute- The relative price and performance of substitutes- The costs
of switching to substitutes

Bargaining Power of Suppliers

Suppliers are the businesses that supply materials & other products into the industry.
The cost of items bought from suppliers (e.g. raw materials, components) can have a
significant impact on a company's profitability. If suppliers have
high bargaining power over a company, then the company's industry is less attractive.
The bargaining power of suppliers will be high when- There are many buyers and few
dominant suppliers- There are undifferentiated, highly valued products. As an
example of IKEA, in recent years, had heard from its customers that many of its
furniture offerings were too complicated to be assembled by the customer; showing
the power of the supplier to make a difference, IKEA has gotten cooperation from
some suppliers to provide materials that are easier for the customer to assemble,
thereby adding value to the supplier relationship.

Bargaining Power of Buyers

Buyers are the people / organisations who create demand in an industry.
The bargaining power of buyers is greater when there are few dominant buyers and
many sellers in the industry and the products are standardised. Buyers have a great
deal of influence over IKEA's product line and direction, for example, in the 1960s,
IKEA developed the ability to package its unassembled furniture in flat cartons,
making it easier for the buyer to handle the cartons.

CONCLUSION
The IKEA group is one of the world’s largest home furnishings companies.
The company considered various values in the incorporation of their supply chain
as part of their process in learning. The company, known for huge stores selling flat
pack furniture and accessories, it would invest 1.5 billion euros to open 25 stores in
Asia's third-largest economy after initially balking at India's sourcing requirements.
The Indian government is also relaxing some of the local sourcing conditions to make
it easier for IKEA and other foreign retailers to enter India

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