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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?
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