Roskilde University
Scandinavian Furniture in China Business Project
Supervisor: Johannes Kabderian Dreyer
Authors: Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087
Number of characters: 172.303 (excluding bibliography)
Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 Table of Contents Executive Summary ...... 1 Introductory Chapter ...... 1 1.1 Introduction ...... 1 1.2 Motivation and Problem Area ...... 2 1.3 Problem Formulation and the Research Question ...... 3 1.4 Literature Review ...... 3 1.5 Delimitations ...... 4 1.6 Structure ...... 5 2 Methodology ...... 6 2.1 Philosophy of Social Sciences ...... 6 2.2 Research Approach and the Purpose ...... 7 2.3 Research Strategy ...... 7 2.4 Theories and Models Used ...... 8 2.5 Research Choice ...... 9 2.6 Sampling ...... 9 2.7 Data Sources and Collection ...... 9 2.8 Criticism of Sources and Methodology ...... 10 2.8.1 Reliability ...... 10 2.8.2 Validity ...... 10 2.8.3 Generalizability ...... 10 3 External Analysis ...... 11 3.1 Macro Environmental Analysis ...... 11 3.1.1 Introduction ...... 11 3.1.2 Political and Legal Influence...... 11 3.1.3 Economic Influence ...... 15 3.1.4 Socio-cultural Influence ...... 17 3.1.5 Technological & Environmental Influence ...... 19 3.2 Micro Environmental Analysis ...... 22 3.2.1 Industry Analysis ...... 22 3.2.1.1 Introduction ...... 22 3.2.1.2 Forces in the Industry ...... 22 3.2.1.3 Competitive Advantage of China in the Furniture Industry ...... 25 3.2.2 Competitors Analysis ...... 28 3.2.2.1 11 Furniture ...... 28 3.2.2.2 Hola Home Furnishing ...... 29 3.2.2.3 TMall ...... 30 3.2.3 Buying Behavior Analysis ...... 31 3.2.3.1 Stimuli ...... 31 3.2.3.2 Organism ...... 32 3.2.3.3 Response ...... 34 3.3 Most Influential External Factors ...... 36 3.3.1 Opportunities ...... 36 3.3.2 Threats ...... 36 4 Company Cases ...... 37 4.1 JYSK ...... 37 4.1.1 Pre-Entry ...... 37 Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087
4.1.2 Entry ...... 38 4.1.3 Post-Entry ...... 38 4.1.4 Financial Situation ...... 40 4.1.5 Conclusion ...... 45 4.2 IKEA ...... 46 4.2.1 Pre-Entry ...... 46 4.2.2 Entry ...... 47 4.2.3 Post-Entry ...... 48 4.2.4 Financial Situation ...... 49 4.2.5 Conclusion ...... 53 4.3 BoConcept ...... 54 4.3.1 Pre-Entry ...... 54 4.3.1 Entry ...... 56 4.3.2 Post-Entry ...... 57 4.3.3 Financial Situation ...... 58 4.3.4 Conclusion ...... 62 4.4 Conclusion on Situation of Scandinavian Furniture Companies in China ...... 63 4.4.1 Strengths ...... 63 4.4.2 Weaknesses...... 63 5 Final Conclusion ...... 64 Bibliography ...... 67
Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 Table of Figures 1: Three Types of Consumers in the Furniture Market ...... 11 2: Air Pollution in World: Real-time Air Quality Index Visual Map- China ...... 20 3: Air Pollution in World: Real-time Air Quality Index Visual Map- Scandinavia ...... 21 4: Maslow’s Hierarchy of Needs ...... 33 5: JYSK- Statement of Comprehensive Income for the Financial Years 2009/10-2013/14 in ‘000 DKK ..... 40 6: JYSK- Statement of Financial Position for the Financial Years 2009/10-2013/14 in ‘000 DKK...... 41 7: IKEA- Statement of Comprehensive Income for the Financial Years 2011-2015 in ‘000 EUR ...... 49 8: IKEA- Statement of Financial Position for the Financial Years 2009/10-2013/14 in ‘000 EUR ...... 50 9: Bo-Concept positioning ...... 55 10: BoConcept- Statement of Comprehensive Income for the Financial Years 2011-2015 in ‘000 DKK .... 58 11: BoConcept- Statement of Financial Position for the Financial Years 2009/10-2013/14 in ‘000 DKK ... 59 12: JYSK- SWOT Model ...... 64 13: IKEA- SWOT Model ...... 65 14: BoConcept- SWOT Model ...... 66 Table of Tables 1: Governance Indicators- The Percentile Ranks of China and Scandinavia, Net Difference and Standard Deviation ...... 14 2: Corporate Tax and VAT- in % for China and Scandinavia, Net Difference and Standard Deviation ...... 14 3: Ease of Doing Business: The Ranks of China and Scandinavia, Net Difference and Standard Deviation page ...... 14 4: GDP growth- Annual Growth 2014, 2013 and the Difference in Growth 2013 to 2014 ...... 17 5: Inflation rates- China and Scandinavia ...... 17 6: Household final consumption expenditure per capita (constant 2005 US$) ...... 19 7: JYSK- Profitability Ratios ...... 42 8: JYSK- Efficiency Ratios ...... 43 9: JYSK- Liquidity Ratios ...... 44 10: JYSK- Leverage Ratios ...... 44 11: IKEA- Profitability Ratios ...... 51 12: IKEA- Efficiency Ratios ...... 51 13: IKEA- Liquidity Ratios ...... 52 14: IKEA- Leverage Ratios ...... 53 15: BoConcept- Profitability Ratios ...... 60 16: BoConcept - Efficiency Ratios ...... 61 17: BoConcept- Liquidity Ratios ...... 61 18: BoConcept- Leverage Ratios ...... 62
Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 Executive Summary This paper deals with the challenges that Scandinavian furniture companies face when establishing business operations in China and how do they manage to maintain a strong position on this market.
China is the world's largest exporter of furniture, fact that creates a high level of competition on the local market. This can be rather hard to cope with for a company that is new on the market. Furthermore, the cultural differences raise the adaptability challenges for new companies entering the Chinese market.
China is a country with great manufacturing opportunities. This is mainly due to lower labor costs. In the past years, governmental reforms managed to lift a big part of the Chinese population out of poverty. Overall, the wages and living standards of the population are improving, resulting in a higher purchasing power. All of these factors along with the big size of the market attracted to attention of many businesses to export their products and services to China. However, the support of the government for economic growth also created a series of economic imbalances and environmental concerns. This did not discourage foreign businesses to continue their activity in China, especially the ones in the furniture industry, a segment that is blossoming.
The paper makes use of positivism as an epistemological view, combined with an objective stance. This allowed research to be conducted through an external view, independent of social actors. All of these were combined with a deductive research approach that facilitated the explanation of the causal relationship between the Strategy of Scandinavian furniture companies and their success in China. Furthermore, multiple case studies were used as a research strategy in order to have a good understanding of the companies' performance on the Chinese market and to establish similarities between the chosen companies.
The overall effectiveness and political stability of China is improving. However, the country still has a low freedom of expression due to the strong embodied communist, fact that can affect the countries' entrepreneurial spirit. Furthermore, there is still a high level of bureaucracy in the country and a rather high level of inefficiency in the business market.
In order to increase domestic consumption, the government has been taking an active stand to implement policies that increase employment and wages. These policies were restructured to focus on growth in the high-end products market. Moreover, there are plans to encourage urbanization by building more affordable homes and cutting the tax burden on households.
Compared to the Scandinavian market, China is less stable politically and corruption is not controlled as much as in Scandinavia. This shows that Scandinavian companies may have high difficulties to operate in China.
From an economic point of view, the Chinese economy is growing. The amount of imported goods has been increasing. Since 2005, all imported furniture has a zero tariff. Interest rates have been cut to support the economy and consumer spending increased. On a parallel, the Scandinavian market has a more stable economy, with lower growth levels than in China. Labor costs are higher in Scandinavia. Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087
The positive economic development resulted in improvement in people's lives. Along with it, it has been noticed a shift in furniture demand towards fashionable and new, rather than "life-concept" furniture. The Scandinavian market, however, has a higher purchasing power for high quality furniture and customized design.
Within China, high efforts are also put into becoming a highly innovative country. Reduction of CO2 emissions and increasing CSR policies are aspects of high focus for the government.
From 2010 to 2011, the furniture industry registered a total production value increase of 25.28%. The industry is highly fragmented with over 50.000 furniture manufacturers in China. This shows the high competitive rivalry in the industry, where brand is a vital aspect when choosing furniture.
The bargaining power of consumers is high due to the big supply on the market and increase in purchasing power.
The supply of wood as a raw material for furniture is on decline. This implies that many manufacturers will have to rely on imported wood for production. This, along with a decrease in skilled work force results in a moderate power of suppliers.
Initiatives to support affordable housing are an important threat to consider for the high-end furniture. The focus on the lower-end of the market along with a low brand loyalty might result in a replacement of the high-end furniture with low-end one. However, quality is the most important factor influencing the purchasing decision of furniture, decreasing the competitive advantage of low quality furniture.
Real estate is an important industry supporting the furniture market in China. The cut down in loan interest rates along with payments for real estate and transaction taxes were meant to solve the issue of many unsold properties. However, it resulted in an increase in real estate property in urban areas. This can either support the purchase of high-end furniture or impact it negatively as people might have to lower their budgets for furniture in order to pay for the property.
Culture also has a big influence on the Chinese corporate environment. Formal authority is very important for the population and companies often have a hierarchical structure with clearly defined working areas. Company growth is the responsibility of the leaders who need to have a good cultural understanding and high adaptability to rapid market changes. Nepotism is still a big practice and live to work is a driving motto.
As mentioned previously, competition on the Chinese furniture market is fierce. Common local practices include copying the entire look, feel and service of successful Western brands. This, supported by low intellectual property protection, creates a tough competitive environment for Scandinavian companies entering China. 11 Furniture is a Chinese store that copied the entire concept of IKEA, to the extent of having the same colors within the brand logo and display. Hola Home Furnishing is between the strongest furniture giants in China catering to all customers segments: low-end furniture, average and designer high-end pieces. Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087
"Mianzi" and "guanxi" are two very important concepts for the Chinese consumers. These are related to the way Chinese people are perceived in the society and the relationships created with others. A high emphasis is put on the opinion of others and what other can see. Therefore, while purchasing furniture; Chinese consumers will also have in mind what the others might like. If a brand reflects the values of people from the same reference group, the consumer will stick to that brand, even though the general brand loyalty is low. Hence, word of mouth has a high influence on brand performance. Social class will also impact the type of furniture bought: high-end and eco-friendly furniture versus affordable yet qualitative furniture.
People aged 35-59 focuses more on rational values when buying furniture, such as quality. Older people focus more on financial pressure, while design and marketing channels influence young people. Online purchases are a growing practice between average-earners, while high-income earners buy at specialty stores. After-sales repair and maintenance service is of highly importance for Chinese consumers.
JYSK is one of the Scandinavian furniture companies that, once entered on the Chinese market, had to adapt their product portfolio and marketing strategy to the cultural differences. Even though the company registered losses in the first years, the reconsideration of their strategy created a better targeting on the market and an overall performance improvement. The main issues that the company encountered were the lack of credibility and the high width of product portfolio and price differences, fact that caused problems with customer's perception. At the same time, brand identity was missing.
IKEA entered China using a joint-venture entry mode in order to overcome political risk and gain competitive advantage. This brought challenges in terms of product pricing as local competitors could produce cheaper furniture. Furthermore, other challenges encountered were the hate of Chinese people towards self-assembly furniture and the positioning of stores in suburbs areas. The marketing strategy also proved to be inefficient. Shortly the company enriched their product offering for the Chinese market and also adapted the design of the current products to meet the living conditions within the country.
BoConcept also encountered big challenges on their entry on the Chinese market. Using franchise as an entry mode, the company had very big difficulties in fighting local "copycats" that lowered their profits substantially. However, after high efforts, the owner of the franchise managed to eliminate from the market a big number of companies copying the BoConcept products and hereafter improve overall performance.
To conclude, one of the vital aspects for Scandinavian furniture companies to maintain their competitive advantage on the Chinese market is their ability to adapt their concept to local demand. Furthermore, international experience and financial resources help the process. The Scandinavian origin is a factor giving advantage over local brands through a general perception of quality and credibility. It should be considered that global strategies are not applicable in China and that product portfolio changes are required. Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 1 Introductory Chapter 1.1 Introduction China, officially known as People’s Republic of China, is the second biggest world economy. From an economic standpoint, China experienced a great amount of growth since 1978, when a set of economic reforms was introduced. The country had also recovered quite well from the global financial crisis; however, the policies introduced during the crisis were focused more on investment, while repressing the household consumption. The global financial crisis did influence countries outside of China, which resulted in slower growth in imports to the country, which started recovering in 2009.1
China is a land of manufacturing opportunities due to lower labor costs. Chinese secondary sector (comprising industry and construction) covered 45% of the county’s total output. This sector creates a lot of jobs, and together with many reforms that the government had introduced, China managed to lift a lot of its population out of poverty (more than 500 million since 1981).2 The wages of Chinese people and the living standards are also improving, which goes hand-in-hand with increased purchasing power.3 This fact has increased the interest of foreign companies to export their products and services to China. There are several advantages to the companies operating in China, like lower fixed costs (due to wage level), big market (1,4 billion people, which means that 1% market share is 14 million people), or access to already established factories, and access to other Asian markets due to small geographic distance; this can also decrease the distribution costs to Asia for companies from Europe or America.
These factors attracted many companies, among which are Scandinavian manufacturing and service companies that outsourced their production (or a part of it) to China. For example, IKEA has successfully entered the Chinese market with production before, and later continued the expansion by establishing their stores in China. However, due to the big cultural difference between IKEA’s home market, and China, the company had to adapt its strategy. 4 This is an illustration of the fact that there are negative factors influencing the market from an importer’s perspective.
Especially, when looking at the Scandinavian market, the cultural and physical gap is huge.5 This can create differences between employees in China, and the company’s home country, as well as difficulties in communication. Even though the economic growth of China was significant, there is a concert for the economic slowdown in the country. Government was supporting economic activity with the introduced reforms, however, this created some challenges for the economic growth, among which are economic imbalances and environmental concerns, or rising economic inequality, which might impact the operation of the foreign traders in China, which hold a significant market share. 6
1 http://www.focus-economics.com/countries/china, 15.04.2016 2 http://www.worldbank.org/en/country/china/overview#3, 15.04.2016 3 http://www.mckinsey.com/industries/retail/our-insights/mapping-chinas-middle-class, 15.04.2016 4 http://marketingtochina.com/ikea-and-its-competition-in-china/, 15.04.2016 5 https://www.iei.liu.se/indek/utbildning/industriell-marknadsforing/teim03/file-archive-2013/1.520956/Examole- EssayChinaandSweden.pdf, 15.04.2016 6 http://www.focus-economics.com/countries/china, http://www.ibtimes.co.uk/what-are-global-implications- chinas-economic-slowdown-1516324, 15.04.2016
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087
Despite this, certain companies remain successful and optimistic about their future in China. This is because, although there has been an economic slowdown, some industries are blossoming. Among these industries is the furniture industry, which we will turn our attention to, in this project.
1.2 Motivation and Problem Area Chinese furniture retail is a vast market with a 13,9% increase in sales (2014) of 227,3 billion RMB (229,7 DKK). The average annual growth rate for Chinese furniture industry is 15%7. It is estimated that the furniture replacement in particular is a determinant for significant growth; approximately 44 million households will replace furniture every year, which, together with the improvement in living standards and increase in consumer spending, significantly contributes to the industry expansion. Finally, furniture imports are increasing, and 0 tariffs were employed on most types of furniture.8
However, this has significant implications for domestic based and international companies trading furniture in China. The competition in the industry is intensified. The imported furniture is significantly more expensive than the domestic substitute, and with the increasing demand, Chinese furniture manufacturers and retailers enhanced their focus on the domestic market, where they have a cost advantage over the importers. Average-quality imported furniture cannot compete with the domestic market; this, together with stricter certification requirements in countries, where China exports furniture to, led to importer’s focusing mostly on high-end market, which is still a niche in China. Furthermore, some domestic companies cooperate with foreign designers, and take a big part of the high-end market, while importing companies continue to struggle with furniture deployment in China, where copy right is not well protected.9
It is, however, important to mention that a niche in China is not a traditional one. It is estimated that the upper-middle class constituted approximately 14% of the urban population of China. This corresponds to approximately 35,84 million urban households in China (out of 256).10 In this sense, the potential market for high-end furniture is approximately 6,4 times bigger than the population of Denmark (assuming 5,6 million inhabitants in Denmark11). This is not a traditional niche concept, however, compared to the Chinese population of 1,4 billion12, it constitutes a much smaller part of the market than, for example, the average wage-earners, who account to 54% of the urban households.13
Scandinavian furniture design is in particular focused on the high-end of the market, and certain companies are successful in their imports to and sales in China. Some companies, for example Bo
7 http://owic.oregonstate.edu/sites/default/files/pubs/Chinafurniture.pdf, 04.05.2016 8 “China’s Furniture Market” pdf; p.1,9 9 “Imported Furniture Market in China”; p.3 10 http://www.mckinsey.com/industries/retail/our-insights/mapping-chinas-middle-class, 15.04.2016 11 https://www.google.dk/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=denmark%20population, 15.04.2016 12 https://www.google.dk/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=china+population, 15.04.2016 13 http://www.mckinsey.com/industries/retail/our-insights/mapping-chinas-middle-class, 15.04.2016
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087
Concept, see the Asian, and in particular Chinese furniture market, as a key element in their growth strategy. 14
Considering the fact that the Scandinavian countries are not among the top original importing countries15, intense competition, and relatively high price of Scandinavian furniture, compared to Chinese standard, this is interesting information. The cultural difference between the two countries’ consumer and business behavior furthermore contribute to the curiosity about success. It has been suggested that aspects like environmental friendliness, different design, materials, and style diversification are the primary differentiating factors for the imported furniture.16
1.3 Problem Formulation and the Research Question Based on the above introduction, we could define the research question as:
“Given the intense competition on the Chinese furniture market and environmental challenges, how do the Scandinavian furniture companies manage to maintain a strong market position in China?
To answer the research question, we developed the following 3 working questions:
1. Which macro and microeconomic factors are the most-influencing on the operation of Danish furniture companies in China?
2. What is the situation and strategy of the chosen Scandinavian furniture companies currently present in China?
3. Given these two questions, how do the strategies from the second question overcome challenging factors from the first question.
1.4 Literature Review In search for relevant research topic, and sources, we found several sources, upon which we base our research interest. Many recent publications, and articles point out a slowdown of Chinese economy, and its impact on the world. The two articles that we base our introduction on are the “China Economic Outlook”17 and “What are the global implications of China's economic slowdown?”18. The first article describes the Chinese economy, and the second one explains the slowdown implications. Both articles are from economic journals, and based on them the economic slowdown could have a significant impact on the importers of goods, and companies/countries that trade in China. This might be true, but on the other side, there are several factors that might improve trading in China.
14https://globenewswire.com/news-release/2014/07/24/653384/0/en/BoConcept-concludes-strategic-partnering- agreement-with-Kinetic-to-boost-expansion-in-China.html, 01.04.2016 15 “Imported Furniture Market in China”; p.6 16 “Imported Furniture Market in China”; p.3-6 17 http://www.focus-economics.com/countries/china, 28.04.2016 18 http://www.ibtimes.co.uk/what-are-global-implications-chinas-economic-slowdown-1516324, 28.04.2016
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087
Another one of the sources, “China’s Furniture Market”, shows a positive development of income groups, growing, average and higher, income groups, or the increase in purchasing power. This article points out the potential of furniture market in China, in a global and local concept. The facts stated here are also showing an opportunity for importers to China for growth in furniture-related industries. This is somehow in contradiction with the slowdown of the economy, which would assume decreased growth. IKEA is mentioned in this article, as a successful operator on the Chinese furniture market, which spawned our interest in the topic.
Based on the above, we reviewed the home-page of IKEA, and other Scandinavian furniture companies present in China, as well as a number of articles about their operations. We came across an article called “Focus on IKEA and its competition in China”19, which pointed us at the direction that a key to success in the Chinese market is the ability to adapt to local market needs.
We looked for more companies, and found out that this might be the general tendency, and key to success in Chinese furniture market. Based on these publications, we decided to focus on three different furniture companies from Scandinavia, IKEA, JYSK and Bo Concept, in order to be critical, and try to answer our research question and review our answer in relation to the literature, we built our research on.
1.5 Delimitations This report is focused on analyzing 3 case furniture companies, JYSK, IKEA and Bo Concept, and their post-entry, entry, and post-entry on the Chinese market. This is not enough to represent the whole furniture import from Europe, but as we focus on Scandinavia, we believe that we chose 3 different companies that will best enable us to answer the research question.
In the macro-analysis, the focus is primarily on the Chinese market; however, we also provide a parallel to the Scandinavian market, to show the difference between the two. In the micro environmental analysis, in section 3.2.1.3, we use the Porter’s Diamond to analyze the competitive advantage of China in the furniture industry. We took out the demand conditions from the model, as we believe these were already analyzed in the macro-environmental analysis. Also, as the general perceptions of individual in society, which should be a part of the Porter’s Diamond, are analyzed in the buying behavior analysis, we did not include them in the model.
Company cases show an overview of the pre-entry situation and company development, as well as entry mode to China, and present situation. We also evaluate the financial situation of the companies, to give an overview of the financial resources available. Finally, we look at the strengths and weaknesses of the companies in connection with the pre-entry and post-entry strategy differences. We do not consider the value chain and supply chain of the companies due to the low availability of credible resources, and the scope of the report. However, if we could include these, we would have a better picture of the firms’ strategies.
19 http://marketingtochina.com/ikea-and-its-competition-in-china/, 28.04.2016
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 1.6 Structure
1. Introductory Chapter
Introduction and Motivation Problem Area and Formulation
Literature Review & Deliminations
2. Methodology
Philosophy of Research
Research Approach & Strategy
Data Sources, Collection, Sampling
Criticism of Sources & Methods
3. External Analysis
Macro Environmental Analysis Most Influential External Factors Micro Environmental Analysis
4. Company Cases
JYSK
Conclusion on Situation & Strategy of IKEA Scandinavian Furniture Companies in China
BoConcept
5. Final Conclusion
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 2 Methodology In this section, we will describe the philosophical considerations of social sciences that outline the theoretical approach of this project, and we will explain the methods and theory used to answer the research question.
2.1 Philosophy of Social Sciences The philosophy of social sciences related to the nature and development of knowledge. It is concerned with the people’s view on the world, and the researchers’ views, which will inevitably influence the choice of methodology, as well as the way, in which we are analyzing and approaching the research question.20 This choice should serve as a guideline for our work, and overall, for the research.
Epistemology is concerned with knowledge constitution; specifically “what constitutes acceptable knowledge in a particular field of study”. The epistemological consideration examines whether the social world can be studied in a similar, or the same, way as natural sciences. 21
In our project, the epistemological view adopted is positivism. This is because we are inclined to philosophical stance of the natural scientist, and we work with observable phenomena, as our source of credible data. We examine causality between the strategy of Scandinavian furniture firms, and their success on the Chinese market, based on the collected data.
Ontological perspective examines the nature of reality, and the impact of this on the assumptions, a researcher makes about the way the world operates. There are two aspects of ontology; subjectivism that “holds that social phenomena are created from the perceptions and consequent actions of those social actors concerned with their existence”, while objectivism “portrays the position that social entities exist in reality external to social actors concerned with their existence”.22
Our view, as researchers, is external, and independent of social actors. Therefore, we adopt the objective stance. Positivist and objectivist stance should allow us to achieve accurate results and reflection of reality. We are applying the theoretical frameworks, described later in this chapter, to analyze the success of Scandinavian furniture companies in China, and we believe that generalizations can be formulated about the subject.
In the first chapter, the introductory chapter, we examine the Chinese economy, its slow-down, and the intense competition in the furniture sector. Based on our literature review and preliminary readings, we determined that the success of the Scandinavian furniture might be connected to the high quality, and adaptability of the importer furniture. By adaptability, we mean the ability of a Scandinavian
20 Mark Saunders, Philip Lewis, and Adrian Thornhill (2009), “Research methods for business students”, 5th ed., p.108 21 Mark Saunders, Philip Lewis, and Adrian Thornhill (2009), “Research methods for business students”, 5th ed., p.112 22 Mark Saunders, Philip Lewis, and Adrian Thornhill (2009), “Research methods for business students”, 5th ed., p.110
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 furniture companies to adapt to different environmental conditions in China. We will use the theories to try to conclude on this hypothesis, and either confirm or reject it.
Axiological consideration studies the role that our values, as researchers, play in our research choices. 23 We maintain an external view that is independent of the data collected, while remaining objective. This means that from the axiological view, we are using the positivist view.
2.2 Research Approach and the Purpose Research approach examines the design of the research project with respect to it being deductive (the theory and hypothesis is developed, and research strategy is designed to test is) or inductive (the data is collected and the theory is developed as a result of the data analyses). 24
Our research is adopting positivist epistemology and objectivist ontology. Furthermore, we developed a theory that the success of the Scandinavian furniture companies is related to the high quality of the furniture they import to China, and the company’s adaptability. This leads to the use of deductive approach for our business project.
Based on the above mentioned, our study will explain the causal relationship between the strategy of the Scandinavian furniture companies and their success in China. The report will study this problem in detail and provide conclusions. Therefore, we can say that we are conducting an explanatory study, however, as the research will include some descriptive analyses, we could say that the purpose of the study is descripto-explanatory. 25
2.3 Research Strategy To answer the research question, we are going to focus on answering the three working questions. These indicate that we are going to be making a macro environmental analysis of the Chinese market to summarize the general market and industry conditions. Main focus is, however, at the three chosen companies, and the analysis of their strategy. We want to look at the three individual cases, and draw a causal relationship between the case companies, and their success in overcoming the macro environmental challenges. Therefore, the research strategy that we chose is the case study.
Case study will allow us to gain a complete and rich understanding of the strategy of each case company, and help us evaluate the relationship between the companies’ strategies, macro environment, and the firm’s success in China. As we are examining three case companies, our case study is considered to be a “multiple case study”. 26
23 Mark Saunders, Philip Lewis, and Adrian Thornhill (2009), “Research methods for business students”, 5th ed., p.116 24 Mark Saunders, Philip Lewis, and Adrian Thornhill (2009), “Research methods for business students”, 5th ed., p.124 25 Mark Saunders, Philip Lewis, and Adrian Thornhill (2009), “Research methods for business students”, 5th ed., p.140 26 Mark Saunders, Philip Lewis, and Adrian Thornhill (2009), “Research methods for business students”, 5th ed., p.146
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087
The rationale behind this is that we can examine one case, and observe whether the other case has similar, or the same, findings. In order to provide the most accurate representation of the reality, we are looking into these three cases: Danish high-end furniture manufacturer (Bo Concept), Danish low- end furniture manufacturer (JYSK), and Swedish furniture giant (IKEA); all of these companies are operating in the Chinese market.
2.4 Theories and Models Used → PEST model: This model is a framework of macro environmental factors used as a strategic tool in analyzing the company's general environment. PEST stands for political, economic, socio- cultural, and technological/environmental factors in the macro environment. The purpose of this analysis is to provide better understanding of the macro environmental challenges and opportunities, and guide strategic decision-making.27 We use the PEST analysis to answer a part of the first working question, which focuses on macro-environmental challenges. → Porter’s 5 Forces: This model was introduced by Michael Porter and it analyzes the competitive position in an industry. It assumes that there are 5 major forces in the industry: threat of entry, threat of substitutes, bargaining power of customers, bargaining power of buyers, bargaining power of suppliers and competitive rivalry.28 We use this model to access the competitiveness of the furniture industry in China, and to identify the challenges from the microenvironment. → Porter’s Diamond: The model was introduced by Michael Porter in his book “The Competitive Advantage of Nations”. It is used to assess, the “areas of strength and weakness that can give a country, or industry within a country, a competitive advantage or disadvantage”.29 The model focuses on four key elements: factor conditions, demand conditions, firm strategy, structure and rivalry, and related and supporting industries. In our report, we use this model to identify the advantages/disadvantages of Chinese furniture companies, and the micro environmental challenges connected with this, which is also a part of answering first working question. → Stimuli-Organism-Response (SOR): This model can be adapted to buying behavior, where it means that stimuli is external and internal influence on a buyer, organism is the buyer, and response is the actual purchase by the buyer.30 We use this model to analyze the buying behavior of the Chinese consumers, in order to identify further challenges in the microenvironment. → 5 Steps of Consumer Buying Decision Process: The model was developed by Engel, Blackwell and Kollat in 1968, and it focuses on describing the purchase of a buyer by splitting it into five steps: need recognition, information search, alternative evaluation, purchase decision and post- purchase behavior. We use it as a “response” part of the SOR model. → Maslow's Hierarchy of Needs: The hierarchy was developed by Abraham Maslow, ,and it describes the need of a person classified into five categories: physiological needs, safety, social needs, esteem and self-actualization. The theory states that the needs are fulfilled in an order, as on the pyramid, where physiological needs will be fulfilled before safety need, safety before
27 http://www.cipd.co.uk/hr-resources/factsheets/pestle-analysis.aspx, 28.04.2016 28 https://www.mindtools.com/pages/article/newTMC_08.htm, 16.05.2016 29 https://www.mindtools.com/pages/article/newSTR_92.htm, 28.04.2016 30 http://forklarmiglige.dk/sor-modellen, 16.05.2016
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social need, and so on.31 We use this hierarchy to explain the motivation of individuals when purchasing and its connection to social class. → Financial Reports: Statement of Comprehensive Income, and Statement of Financial Position are financial reports used in annual statements of companies to describe the financial situation, and financial structure of a business. We use these reports to evaluate the financial position of case companies before and after the entry to Chinese market. → SWOT & TOWS model: SWOT model shows an overview of strengths and weaknesses from internal perspective, and opportunities and threats from external perspective. We use this model to summarize the internal situation of case companies and factors from the external environment. TOWS model combines these four elements into strategies. “Maxi-maxi” strategy combines strengths and opportunities, “maxi-mini” strategy combines strengths and threats, “mini-mini” strategy combines weaknesses and threats, and “mini-maxi” strategy combines weaknesses and opportunities. We use this model to evaluate the strategy of case companies in relation to external factors and answer the third working question, as well as the research question.32
2.5 Research Choice We adopt a mixed-method research choice, as we collect qualitative and quantitative data, and we examine and analyze them separately, meaning we do not analyze the quantitative data using qualitative techniques and vice-versa.
2.6 Sampling The sample is represented by the 3 case companies chosen when reviewing the literature. As such, our sampling technique is non-probability purposive sampling33. This is because we chose 3 heterogeneous cases from the population; heterogeneous because we chose three different types of furniture companies. We chose this sampling technique, as it should enable the best possible answering of the research question and to describe the key themes observed.34
2.7 Data Sources and Collection The data used in this report were collected from multiple sources:
- Internal sources- companies’ reports, annual reports, companies’ websites, their own publications, and press releases.
- External sources- market reports, industry analyses, data from banks, international articles, thesis, and other external publications.
31 http://www.simplypsychology.org/maslow.html, 16.05.2016 32 https://www.mindtools.com/pages/article/newSTR_89.htm, 20.05.2016 33 Mark Saunders, Philip Lewis, and Adrian Thornhill (2009), “Research methods for business students”, 5th ed., p.236 34 Mark Saunders, Philip Lewis, and Adrian Thornhill (2009), “Research methods for business students”, 5th ed., p.239
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 2.8 Criticism of Sources and Methodology 2.8.1 Reliability We chose the data based on their reliability and suitability. First, we made a preliminary research for our introduction and motivation. Then, we scaled down the chosen sources to few sources that we believed are the most reliable. We evaluated this based on where the data comes from, and chose the ones from well-know reliable resources, like e.g. MarketLine, McKinsey, Economist, or World Bank. The other less known sources, like thesis, were evaluated based on the data sources used for them. On the other side, the internal sources used are hard to evaluate on their reliability. The financial statements have to be a true reflection of the companies’ financial situations, and therefore, we consider these reliable. However, the other sources might be biased, as they are provided by the company, and there might be inconsistencies.35
2.8.2 Validity We scaled our data sources based on their validity as well. We tried to use the ones that would express the valid view on our findings. Therefore in researching e.g. the economic factors in the macro environment, we examined the economical reports about China that showed certain causality to the working questions and the overall research question. The most important criterion for evaluating suitability of data is the measurement validity.36 We can say that the data sources collected give as a valuable insight, and they enable us to answer the research question. Therefore, we believe that the measurement validity is high. The measurement invalidity was minimized by choosing mostly the sources of original data. However, there might be a measurement bias37 (particularly the deliberate one) in the companies’ internal sources, in order to shape their public image, though this is not confirmed.
2.8.3 Generalizability There is also a concern for external validity, also known as generalizability. This is connected to the fact whether the results of a research can be applied to other setting- be generalized.38 This might look like a concern for us, as we are only examining 3 companies in this report; however, for the purpose of the research question, which is focused on Scandinavian furniture companies in China, we believe, this is sufficient. Furthermore, as we can see in the conclusion, the similarities between cases show us that there is a place for generalizability.
35 Mark Saunders, Philip Lewis, and Adrian Thornhill (2009), “Research methods for business students”, 5th ed., p.274 36 Mark Saunders, Philip Lewis, and Adrian Thornhill (2009), “Research methods for business students”, 5th ed., p.277 37 Ibid 38 Mark Saunders, Philip Lewis, and Adrian Thornhill (2009), “Research methods for business students”, 5th ed., p.158
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 3 External Analysis 3.1 Macro Environmental Analysis 3.1.1 Introduction The geographical market scope relates to the country of China, as the focus of the report is on the Chinese furniture market. This market have experienced a significant growth over the past years; in 2014 the furniture retail sales increased by 13,9%. There is a vast potential for expansion in this market due to many factors; for example, due to furniture replacement, which is estimated to have a total value of 44 billion RMB (45,9 billion DKK) per year. This is approximated based on the number of households (440 million), average furniture replacement time (every 10 years), and the average replacement spending of 1000 RMB per household. 39
Furthermore, the branch chosen for the report is the furniture consumer market (business-to consumer), more specifically home furniture. Consumer-wise, the market includes 440 million households, and can be divided into three main targets identified below.
Figure 1: Three Types of Consumers in the Furniture Market40 Consumer type Price concern Wants
Rich consumers with little or no Expensive style- Western, traditional Avid consumers concern for prices Chinese or avant-garde furniture
Luxury/branded goods Higher than average earners with Furniture that reflects taste and consumers moderate concern for prices personality, and follows trends,
Average wage-earning Average earners, which perceive Interested in low-priced quality consumers price as the dominant factor furniture
3.1.2 Political and Legal Influence Overview For more than 60 years China has been under the leadership of the communist party and the leadership has been able to impose decisions and regulations without any deliberation or negotiation. The Communist Party of China remains the largest political party in the world with over 70 million members.41
China overseas direct investment stock has increased more than three times of 2008 level, up from $7.8 billion in 2008 to $26.19 billion in 2013. This has led to an enormous increase in the influence of China in Africa. There are reports that many developing nations such as Nigeria keep the Chinese Yuan as a reserve currency, highlighting the importance of China in the global economy. Being a
39 “China’s Furniture Market” pdf; p.1 40 Self-constructed figure based on “China’s Furniture Market” pdf; p.1-2 41 “China In-depth PESTLE insights” by MarketLine, p.16-19
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 permanent member of the United Nations Security Council, it has immense power over UN decisions and its global policymaking bodies.42
China has deteriorating relationships with some of its neighbors due to territorial disputes. Neighbors including Japan, Vietnam and the Philippines have all accused China of creating instability in the region due to its quest for territorial expansion. Chinese tensions with Japan were aggravated in November 2013, when China expanded its Air Defense Identification Zone (ADIZ). Chinese ADIZ also covers the airspace above the Senkaku/Diayou islands, which have been a source of dispute for the last four decades. Japanese Prime Minister Shinzo Abe's visit to the Yasukuni shrine in Tokyo in December 2013 brought in strong condemnation from China and added to worsening of bilateral ties; the shrine honors the spirits of 14 high-ranking war criminals among the 2.5 million Japanese war-dead. Strained relationships with neighbors could hurt China's political and economic interests in the region.43
The Chinese Communist party outlined substantial legal reforms in its fourth plenum central committee meeting, held in October 2014, which are expected to strengthen the rule of law in the country. The CCP issued communiqué on comprehensively advancing the rule of law in china, which includes key reforms such as allowing prosecutors to institute public interest litigation, speeding up the formulation of the country's anti-corruption law, and establishing courts with jurisdictions spanning across different administrative regions.44
A risk China faces politically is the human rights abuse. China has been known to take severe action against people who criticize their government. Also it is known that China has a heavy censorship of the media and the Internet. The lack of freedom of expression is likely to have its effect on innovation and creativity in the long term.45
More recent policies, implemented by Chinese government, focus on the increasing employment, wages and spending in order to increase domestic consumption. 46The economic policies were restructured to focus on growth in a high-end products market by identifying the seven “strategic emerging industries” (SEI). This industries should become the basis for modernization and technological, development. It was proposed that the policies and projects under this initiative should be available for investors from both domestic and foreign markets, however, access to funding seems to be favoring the domestic based enterprises due to the requirement for locally owned intellectual property. This should change in the future to ensure that the foreign enterprises are not discriminated. 47This could be both a positive and a negative factor for the foreign furniture manufacturers/retailers importing or operating in China; it all depends on the future development of the SEI initiative.
42 “China In-depth PESTLE insights” by MarketLine, p.16-19 43 Ibid 44 Ibid 45 Ibid 46 “China In-depth PESTLE insights” by MarketLine, p.52 47 https://www.uschina.org/sites/default/files/sei-report.pdf, 03.05.2016
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Government plans to increase spending in the areas of social security, pensions, healthcare and income distribution. This is because of increased savings, which led to decrease in consumption. Furthermore, there are plans to build more affordable homes, encourage urbanization, and help rural by cutting the tax burden on households. 48 This is a positive factor, as increased spending and affordable housing could lead to growth in demand for higher quality or branded furniture.
In the study developed by World Bank, 215 countries and territories were studied from a perspective of governance indicators between 1996 and 2014. The measurements were done on a scale between 0 and 100 percentile rank, where 0 is the lowest ranking possible. China ranked 47,12 percentile (increase of 0,22 from 2013) in the control of corruption, 66,35 percentile (increase of 11,8) from 2013) in government effectiveness, and 29,61 percentile (increase of 2,59 from 2013) in political stability and absence of violence/terrorism in 2014. China also recorded an increase (1,65) percentile in regulatory quality, rule of law (2,97 percentile), and voice and accountability (0,2 percentile). 49 This means that the overall effectiveness and political stability is improving, however, some indicator still remain low. For example voice and accountability is low due to strongly embodied communist principles, and the governmental control of media.50
From the legal perspective, China needs to revise the taxes on foreign investors, and simplify the clearance and custom duty requirements.51 The corporate tax is 25%, and 15-20% for SMEs; VAT is 13% reduced and 17% standard. 52 According to the World’ Bank “Doing Business 2016”, China ranked 84th out of 189 countries in the ease of doing business, and 96th in trading across borders. This indicates that there is still a high level of bureaucracy, and inefficiency in business environment.53
Parallel to Scandinavian Market Influence To make a comparison with the Scandinavian market influence, we created a table showing the previously mentioned governance indicators investigated by World Bank. The table shows the rankings of all 5 Scandinavian countries and China, their average, and the net difference between the average and Chinese ranking position. Based on this data, we can say that the difference between the political environment in Scandinavia and China is quite big. This difference is most visible in voice and volatility criteria, which represents “perceptions of the extent to which a country's citizens are able to participate in selecting their government”.54 There is also a big difference between the political stability and corruption control, signaling that the Chinese market is less stable than Scandinavian one, and that corruption is still not controlled as much as in Scandinavia.
48 https://www.uschina.org/sites/default/files/sei-report.pdf, 03.05.2016 49 http://data.worldbank.org/data-catalog/worldwide-governance-indicators, 03.05.2016 50 “China In-depth PESTLE insights” by MarketLine, p.53 51 “China In-depth PESTLE insights” by MarketLine, p.76 52 Ibid 53 http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB16- Full-Report.pdf, 03.05.2016 54 http://info.worldbank.org/governance/wgi/va.pdf, p.1
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087
Table 1: Governance Indicators- The Percentile Ranks of China and Scandinavia, Net Difference and Standard Deviation55 Scandinavia Net Individual Scandinavian Countries Indicator China Average Standard Difference Denmark Finland Iceland Norway Sweden Deviation Control of Corruption 47,12 97,69 2,08 50,58 99,52 98,08 94,23 99,04 97,60 Government Effectiveness 66,35 95,67 2,98 29,33 96,15 99,04 90,87 96,63 95,67 Political Stability and Absence of 29,61 89,13 6,24 59,51 79,61 95,63 93,20 90,29 86,89 RegulatoryViolence/Terrorism Quality 45,19 93,94 4,03 48,75 94,71 98,56 87,98 92,31 96,15 Rule of Law 42,79 97,40 3,76 54,62 99,52 100,00 90,87 99,04 97,60 Voice and Accountability 5,42 97,73 2,35 92,32 97,04 98,03 94,09 100,00 99,51
Furthermore, the corporate tax rates and standard VAT comparison is shown below. There is not a big difference in corporate tax, however, there is a 7,6% difference in value-added tax (difference between the average in Scandinavia and China):
Table 2: Corporate Tax and VAT- in % for China and Scandinavia, Net Difference and Standard Deviation56 Scandinavia Individual Scandinavian Countries Net Indicator Standard China Average Difference Denmark Finland Iceland Norway Sweden Deviation Corporate Tax 25,00% 22,50% 2,92% -2,50% 23,50% 20,00% 20,00% 27,00% 22,00% VAT (standard rate) 17,00% 24,60% 0,55% 7,60% 25,00% 24,00% 24,00% 25,00% 25,00%
Regarding the ease of making business, below, you can see the rankings, average and net difference. This is different among the Scandinavian countries. However, even if we compare on an individual, not average, level, we can see that it is much harder to trade in China and across its borders than in Scandinavia. Overall, political and legal factors show that the Chinese political environment is less stable and it may be more difficult for Scandinavian companies to operate in China due to lower ease of making business and trading across borders.
Table 3: Ease of Doing Business: The Ranks of China and Scandinavia, Net Difference and Standard Deviation57 Scandinavia Individual Scandinavian Countries Net Indicator Standard China Average Difference Denmark Finland Iceland Norway Sweden Deviation Ease of Making Business 84 10 6 -74 3 10 19 9 8 Trading across Borders 96 32 24 -64 1 32 64 45 17
55 Self-made table, data collected from http://data.worldbank.org/data-catalog/worldwide-governance-indicators, 03.05.2016 56 Self-made table, data collected from https://www.ricksteves.com/travel-tips/money/vat-rates-in-europe, http://www.tradingeconomics.com/euro-area/corporate-tax-rate 03.05.2016 57 Self-made table, data collected from http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB16- Full-Report.pdf, 03.05.2016
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 3.1.3 Economic Influence Overview The economic system of the second largest world economy is a hybrid system of socialism and capitalism, which the country describes as socialist market economy". There is relatively high level of state control; for example, banking is under this control.58 As the pitfalls of both systems had a negative effect on the economy (political corruption, increased income gaps, etc.), China regained control over economy, and introduced reforms strengthening the control over financial system, and support of market-oriented institutions. The state uses 5-year plans, currently with the aim of balanced wealth distribution, improved education, and medical care; this resulted in a positive economic growth (11.7% from 2006-2010).59
Chinese economy is growing, but the growth rates (GDP) are decreasing. The biggest portion of the GDP is brought by the industrial sector (46,51%). This sector has experienced a significant expansion due to low labor costs.60 This had decreased the overall unemployment rate, and, together with other government reforms, contributed to the improved living conditions for Chinese consumers, and increased spending and purchasing power. This led to an increase in spending on home furnishing, including a rise of demand for children’s furniture, outdoor furniture, more expensive wooden furniture, and overall higher willingness to spend money on furniture décor. 61
The above had a positive impact on imports of goods, including furniture, where imports had been increasing. This was also due to the significant drop in furniture tariffs, where a zero tariff has been applied for almost all furniture types since 2005. However, an increasing set of regulations regarding the composition, testing, packaging, and production of furniture might have a negative economic effect for the foreign traders.62 China is the world’s largest exporter of furniture, which might be a challenge for the importers in terms of competition from the home market.
Urbanization, rising by 1 % on average every year, further increases the consumer spending, as their income is larger. This presents a move from low and average-earner to a higher-income group, and increases the size of the market for luxury/branded furniture goods. Country’s renovation projects should result in over 37 million reconstructions of houses, which would also mean an increase in home- furniture demand.63
The exchange rate of the Chinese currency (RMB) is most often measured against the USD, and when making transactions in China, foreign currency (with exception of certain countries; Denmark not included) has to be translated to the USD first, and then the USD-RMB exchange rate applies. On August 2015, Chinese currency was devalued against the USD, which means 1 USD is worth more RMB, which is
58 http://www.fsmitha.com/h2/ch37-econ6.htm, 27.02.2016 59 “China In-depth PESTLE insights” by MarketLine, p.56-57 60 “China In-depth PESTLE insights” by MarketLine, p.61 61 “China’s Furniture Market” pdf; p.1 62 “China’s Furniture Market” pdf; p.8 63 “China’s Furniture Market” pdf; p.1
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 positive for foreign traders, as they buy for less and sell for more. 64However, as the exchange rate is highly sensitive and mostly controlled by the Chinese state, the stability of the currency is hard to establish, which will influence the exchange rate risks for foreign companies trading in China.
Final consideration should be given to the economic impact of interest rates. China’s central bank cuts the interest rates in order to speed up the economy, an increase growth rates. Most of the growth is generated by the fixed investments, which is reaching its limit; therefore, an increase in consumption is needed to accelerate and increase the growth.65 The interest cuts are, however, not sufficiently successful, as Chinese companies have experienced a sharp rise fall (6%) resulting in high corporate debt and poorer profitability. 66 This could present a threat, as lower profitability for companies could mean the wage-cuts or increasing unemployment, and that would decrease the spending of individuals and households. The whole situation could potentially result in a significant decrease of consumer spending, given the size of the market. However, the need for increased consumption in order to realize growth should play a role in policy creation in the future.
There is a positive development of consumer spending in general, and increased demand for furniture on the market. This was fueled by government reforms, as well as changing wealth distribution, and increase purchasing power consumers, caused by the improved living conditions. The economic growth and rising urbanization will also have a positive economic effect in the market.
Low import tariffs on furniture are a positive influence, while increasing set of government policies and regulations, regarding production and testing of furniture goods, creates a negative one.
Exchange and interest rates fluctuations might present increase in trading and holding assets, exchange risks, as well as unpredictability of the environment. As exchange rate is given as USD to RMB for most international traders, not only the change in this rate, but also a change in domestic currency (in our case DKK) in relation to USD can have an impact on profitability. The interest cuts together with falling prices, and increasing debt are lowering the profitability of Chinese companies, which might result in wage-cuts, increased unemployment, and in turn lower consumer spending.
Parallel to Scandinavian Market Influence In terms of economic situation, the Scandinavian market has a more stable economy, while growth is not as significant as in China. As we can see in the table below, China has higher average GDP annual growth than any of the Scandinavian countries. These had recorded a negative growth as well, e.g. Norway, but in general the GDP growth is increasing in all Scandinavians except for Iceland, while Chinese growth is slowing down.
64 ”China’s Yuan Move Highlights Importance of Exchange Rates for Policy Makers”; http://www.wsj.com/articles/chinas-yuan-move-highlights-importance-of-exchange-rates-for-policy-makers- 1439299109, 2016-02-27 65 ”What China’s interest rate cut means after everyone predicted it” by Scott Cendrowsi, http://fortune.com/2015/10/26/what-chinas-interest-rate-cut-means-after-everyone-predicted-it/, 2016-02-27 66 ”What China’s interest rate cut means after everyone predicted it” by Scott Cendrowsi, http://fortune.com/2015/10/26/what-chinas-interest-rate-cut-means-after-everyone-predicted-it/, 2016-02-27
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Table 4: GDP growth- Annual Growth 2014, 2013 and the Difference in Growth 2013 to 201467 Scandinavia Individual Scandinavian Countries Net Indicator Standard China Average Difference Denmark Finland Iceland Norway Sweden Deviation GDP growth (annual %) 2014 7,3% 1,4% 1,1% -5,9% 1,1% -0,4% 1,8% 2,2% 2,3% GDP growth (annual %) 2013 7,7% 0,8% 1,9% -6,9% -0,5% -1,1% 3,9% 0,7% 1,2% GDP growth (change %) 2013-2014 -0,4% 0,6% 1,5% 1,0% 1,6% 0,7% -2,1% 1,5% 1,1%
Labor costs are much higher in Scandinavia, and the GDP growth also reflects that the countries were hit by financial crisis. 68 Compared to China, there is no exchange rate risk for Danish companies in Denmark, and the Danish political system has more stability, as the Chinese one.
Inflation rates are relatively lower in Scandinavia, but they are rising, while Chinese inflation rate is steadier69. Below is the overview of inflation rates in Scandinavia compared to China.
Table 5: Inflation rates- China and Scandinavia70 Scandinavia Individual Scandinavian Countries Net Indicator Standard China Average Difference Denmark Finland Iceland Norway Sweden Deviation Inflation rate (% March 2016) 2,3% 1,1% 1,4% -1,2% 0,0% 0,0% 1,6% 3,3% 0,8% 3.1.4 Socio-cultural Influence Overview Chinese population has been growing steadily resulting in China being the most populous nation in the world. This led to the development of “one-child policy”, under which a couple could only have one child. In 2013, this policy was changed because of concern for aging population, and now a couple can have two children, if one of the couple is an only-child. The concern for rapidly aging population continues to be a problem, together with gender imbalance triggered by the preference for male offspring.71
With the changing political and economic landscape, the concern for health, social benefits and affordable housing increased, as mentioned previously. This is a positive indicator, as increased affordable housing together with more available spending could increase demand for better, higher- quality furniture. Especially the focus on increasing wages, and supporting equal income distribution should increase consumer spending significantly.
This economic development and improvement of people's lives, the consumption concept has undergone profound changes; the demand for furniture has put more emphasis on "durable" and
67 Self-made table, data collected from http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG, 04.05.2016 68 http://www.marketresearchreports.com/countries/denmark,09.03.2016 69 http://www.tradingeconomics.com/country-list/inflation-rate, 04.05.2016 70 Ibid 71 “China In-depth PESTLE insights” by MarketLine, p.67
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“new." Furniture style from “generation to generation” or “life-concept” furniture, has now has been replaced by the pursuit of fashion consumer psychology72.
Furniture industry’s social and cultural environment can be analyzed from the following four aspects: 1. Consumer custom: From the target-market point of view, the low-level, low-cost furniture is still the mainstream purchasing category; ordinary wage earners are the main consumer target group. Their consumption requirements are: simple, practical and contemporary aesthetic; more features to take advantages of the limited living space, middle and high level of design style. However, they require low price with a good value for money; there is a huge market demand for this group. At present, furniture market is dominated by unknown furniture brands73; they are good at copying and imitation, but are not experts in original design and development. They attract the majority of the middle and lower levels of consumer groups, because of the cost advantage. 2. Consumer concept: With the enhancement of people’s living standard, Chinese people’s consumer concept has been changing a lot. “Furniture as appliance” concept is a thing of the past; nowadays, the concept has evolved into both “appliances and decorated crafts”74. This will shorten the period for furniture replacement; in addition to more people being able to get married and build houses, which will contribute to the need of new furniture, and, therefore, increase the demand in the future. 3. Multi-functional: The furniture should be “from outside to inside”, meaning that the factors of the outside environment (home space) determine the form and function of the furniture itself. Furniture should be diverse and varied; good furniture works show the charm through life, environment, and human needs.75 4. Conform to the trend: Furniture has become a lifestyle. There is a higher requirement for furniture’s creativity and culture; the furniture has become art and culture carrier. The styles and patterns of furniture reflect a region, a period of people’s consumption preferences and cultural fashion, as well as the socio- economic, cultural development level. It is an important manifestation of consumer’s concept and consumption levels. This determines the style of furniture products, materials and designs should conform to the local region’s trend. 76
Parallel to Scandinavian Market Influence The Scandinavian market is very different in many socio-cultural aspects. Due to very different economic conditions, political structure, and population composition. If we look at the household income, and consumption expenditure, we can observe the following:
72 https://club.1688.com/article/60508524.html, 27.02.2016 73 https://en.wikipedia.org/wiki/Chinese_furniture, 27.02.2016 74 http://www.biud.com.cn/news-view-id-19858.html, 27.02.2016 75 Ibid 76 Ibid
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Table 6: Household final consumption expenditure per capita (constant 2005 US$)77 Scandinavia Individual Scandinavian Countries Net Indicator Standard China Average Difference Denmark Finland Iceland Norway Sweden Deviation Per capita (constant 2005 US$) 2014 1.420 25.843 5.142 24.423 23.264 21.280 30.272 32.443 21.957 Per capita (constant 2005 US$) 2013 1.307 25.604 4.996 24.297 23.197 21.259 29.704 32.165 21.693 (change %) 2013-2014 113 240 217 127 67 21 568 278 264
As we can see, in all observed countries, the household final consumption expenditure is increasing. However, the difference between the Chinese and Scandinavian (measured individually or by average) expenditure is massive. This is a good illustration of how much money is available for the household in China. Due to very high living standards, good social system and relatively low income inequality in Scandinavia, people can afford to buy more.
This applies to furniture as well. Scandinavians, having much more to spend, can afford to buy higher quality or desired design, while majority of Chinese looks for a lower-end furniture products. Trends are, however, changing, so the expenditure is expected to rise, and the social analysis shows that Chinese people are becoming keener to choose higher quality and spend more on their furniture.
3.1.5 Technological & Environmental Influence Overview China is a country with high potential for research and development. The country signed R&D pacts with more than 150 countries around the world.78 At the same time, the country is part of more than 1.000 international scientific organizations.79 All of these increased China’s global influence in the field of science and technology. The number of patents acquired by the country show strong growth in innovation. According to a plan developed by the government, China set as an aim to become one of the most innovative countries in the world.80 The plan is set to increase the competitiveness of business and boost local innovation.81
China has a rich biodiversity, with more than 30.000 species of plants.82 However, one of the main problems of the country is pollution. In June 2015, an action plan was submitted by the country’s Government which aims to reduce CO2 emissions intensity by 60-65% by 2030.83 The plan also wants to increase the share of non-fossil fuels in primary energy consumption to 20% by 2030.84 This plan has its roots in the increase in China’s manufacturing capacity that took place without following ecological and pollution control norms. High usage of fossil fuels resulted in acid rains that damaged forests and watersheds. 70% of lakes are polluted and approximately 50% of rivers and lake water is not safe for
77 Self-made, data collected from http://data.worldbank.org/indicator/NE.CON.PRVT.PC.KD, 04.05.2016 78 “China In-depth PESTLE insights” by MarketLine, p. 35 79 Ibid 80 “China In-depth PESTLE insights” by MarketLine, p. 37 81 Ibid 82 “China In-depth PESTLE insights” by MarketLine, p. 42 83 “China In-depth PESTLE insights” by MarketLine, p. 43 84 Ibid
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 human consumption.85 For the furniture industry, the high pollution concerns resulted in many laws and regulations that push manufacturers to include any hazardous or radioactive substances, which might be included in the materials and coatings of furniture, on the product description/label information.86All of the above facts increase the general concern for the environment for the Chinese population.
In the furniture industry, the degree of interest in the use of green materials and after-sales repair and maintenance services exceeds 90%. Mid-to-high end consumers and consumers buying children furniture are now focusing more on concepts of having an “eco home”, with environment-friendly furniture and formaldehyde-free products. In an effort to match market demand, brands incorporate the environmental friendliness in their concepts and have developed “smart” furniture, for example furniture incorporating indoor air purification, and light weight honeycomb board furniture.87
At the same time, there is an increased interest in “soft decor”- furniture easy-to-change and easy-to-move around. This stimulates the development of innovative furniture, both in terms of looks and dimensions. A very popular business model in China is “O2O”. This links online sales and marketing with offline business operations.88 This is due to the diverse consumer patterns developed throughout time in China. Nowadays, not all consumers have time to visit furniture outlets and stores. Hence, inclusion of online websites for businesses is a practice that facilitates the targeting of a broader target group.
Parallel to the Scandinavian Market Influence Scandinavia is a country with low pollution levels, compared to China. This means that there are lower challenges in this market in regards to forestry and wood supply for the furniture industry, compared to China. We can see the overview of the pollution levels below.
Figure 2: Air Pollution in World: Real-time Air Quality Index Visual Map- China89*
85 “China In-depth PESTLE insights” by MarketLine, p. 43, 44 86 “China’s Furniture Market”, p. 8 87 “China’s Furniture Market”, p. 3-7 88 “China’s Furniture Market”, p. 4, 7 89 http://aqicn.org/map/world/, 04.05.2016, *Click on the link for the explanation of colors
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087
Figure 3: Air Pollution in World: Real-time Air Quality Index Visual Map- Scandinavia90
As we can see. Chinese region is mostly unhealthy to hazardous, while Scandinavia is mostly good to moderate.
CSR is a very important aspect for both manufacturers and suppliers of furniture in Scandinavia. It is common between both manufacturers and suppliers to actively engage in the formulation of CSR policies and implementation of it. In terms of production methods, the manufacturers adapt easily to the use of environmentally-friendly production methods and safe working conditions.
Even companies with plants outside Scandinavia, especially in the Far East, implement the same safety working conditions, in an effort to support local labor safety, even though the local regulation does not require all the measures. Danish furniture, for example, is known worldwide for its highly innovative and exquisite design, a perfect combination of form and function that results in a higher unity.91
90 http://aqicn.org/map/world/, 04.05.2016 91 http://www.numbeo.com/pollution/country_result.jsp?country=Denmark, 27-02-2016
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 3.2 Micro Environmental Analysis 3.2.1 Industry Analysis 3.2.1.1 Introduction The industry at focus is the Chinese furniture industry in terms of furniture manufacturing, and retailing. The reason for this is that often times a manufacturer retails its products, and therefore it is important to look at both sides.
The furniture industry in China has expanded rapidly after the market-oriented economic reform. The total production value, as of 2011, was 83,16 billion US dollars, which represents a 25,28% increase from 2010. The traditional material for furniture used to be wood, which prevailed in production. However, it was overtaken by metal, with 363,44 million metal furniture pieces in 2011, and 247,74 wooden furniture pieces.92
Because of the size of the market, the furniture industry is highly fragmented. There are over 50.000 furniture manufacturers in China, which are primarily concentrated around East coast of China. The provinces with most furniture output are Zhejiang (180.00 million furniture pieces), Guangdong (162.00 million furniture pieces), Fujian (111.00 million furniture pieces), Shandong (74.09 million furniture pieces) and Henan (34.10 million furniture pieces). These five provinces account for 80, 57% of the national furniture production.93
3.2.1.2 Forces in the Industry To analyze the industrial forces, we chose to use the “Porter’s Five Forces” model, which identifies 5 main sources of industrial power:
1. Bargaining Power of Customers Buyer power has increased during the recent years. This is because of the changing political and economic landscape, which is oriented towards more consumer spending. The enhancement of income equality, increase in social benefits, more affordable housing, and growing urbanization, increased, and will continue to do so, the purchasing power of buyers. For instance, China’s building home materials index grew by 4,17% from 2012 to 2013.94 Furthermore, because there are so many manufacturers and retailers of furniture in China, the cost of switching to a competitor has become low. The companies compete primarily with use of their brand and good product quality.95 The increasing purchasing power of buyers is even strengthened by their willingness to spend more on home decorative items, and ecologically-friendly furniture. Environmental friendliness, high product quality, and brand name are the order winners in case of furniture purchasing.96
92 “Furniture Market In China”(2012), p.4 93 “Furniture Market In China”(2012), p.5 94 http://www.cens.com/cens/html/en/news/news_inner_45241.html, 06.05.2016 95 Ibid 96 “China’s Furniture Market” pdf; p.1
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087
Even though, the income inequality is prevailing, and the majority of the consumer are from the average-income class, and cannot afford luxury furniture, they are very concerned with the environmental aspects. With growing disposable income, Chinese put more emphasis on life quality. This is especially evident when buying fast moving consumer goods, like consumables, but can also be seen in furniture purchasing. More parents are concerned about the eco and health aspect than ever before, which creates a requirement for the furniture producers.97 Finally, price remains important, as the majority of consumers are average-wage earners, the price remains a very important decision factor. Studies have proved that there is a correlation between the disposable income and tangible aspects of furniture, meaning that the consumers with lower income are more concerned with quality and price, and are in general, very price sensitive. Furthermore, the environmental concern is prevailing among married individuals, rather than single ones.98 Overall, the bargaining power of consumers if high. 2. Bargaining Power of Suppliers As mentioned earlier, there are many furniture manufacturers in China; similarly, there are many raw material suppliers. The problem is that the supply of domestic wood resources is on a decline. This is because of the threat of deforestation and the National Forest Protection Plans introduced in 1998. This led to prediction about a supply gap between what the industry demand and the domestic wood resources. As a result, a lot of furniture manufacturers will have to rely on the imported timber and other types of woods. Main source of log imports is Russia, but there was a huge plunge in log imports due to the Russian softwood export tax. Unfortunately for China, no other country can provide a supply of log even close to the amount previously supplied by Russia. Because of the tax, Russian logs are predicted to be less competitive, and be replaced in part by suppliers from other countries like New Zealand or Canada.99 Regarding lumber, Russia and Canada are the main importers, equal to 56% of the imports. Therefore, the lumber prices will continue impacting Chinese furniture manufacturers. Lumber imports are expected to double in the next years, therefore, the global price of lumber will also affect furniture manufacturers.100 The other material for furniture manufacturing is metal, namely steel. China has many steel manufacturers and high steel production, for example, in 2014, China produced almost 711 million tones finished steel products (US produced around 331,4 in the same year)101, which fulfils the domestic demand from furniture manufacturers. Finally, the supply of labor has been changing. Even though, the population is huge, due to many furniture manufacturers, there has been a recent labor shortage in industry. This is being solved by some manufacturers offering higher wages to attract skilled labor force. Even though, the wages have
97 http://ageconsearch.umn.edu/bitstream/199239/2/Minli,%20W%20et%20al.pdf, 06.05.2016 98 Ibid 99 http://www.woodbusiness.ca/industry-news/increasing-demand-from-china, 06.05.2016 100 Ibid 101 https://www.worldsteel.org/dms/internetDocumentList/bookshop/2015/World-Steel-in-Figures- 2015/document/World%20Steel%20in%20Figures%202015.pdf, 06.05.2016
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 increased, the competition for skilled workers will remain fierce in the future.102 Overall, the bargaining power of supplier is moderate.
3. Competitive Rivalry in the Industry The furniture industry is occupied by a large number of competitors from small local manufacturers to large furniture retail chains.103 As the biggest manufacturer, and exporter of furniture, China was divided into industrial zones, where manufacturing occurs. These zones include major players, while the rest of the industry remains non-concentrated with 80% small and medium sized competitors. The main advantage of these clusters is the better access to suppliers of raw materials, which might lead to superiority in quality, or certain aspects of production. 104
The rivalry in the industry led to the concentration on the second and third-tier cities, which was also affected by the emergence of support for affordable housing. The market in first-tier cities remains oversaturated. There are also many new players entering the industry from foreign markets due to low entry-barrier, and low import tariffs. Switching costs are relatively small, and the number of suppliers contributes to the generally lower customer loyalty.105
As mentioned previously, the competition in the industry is very intense. Because there are so many furniture manufacturers and retailers, the bargaining power of customers is high, and their desires are what make them choose. Lower-wage bracket customers look for cheap and quality furniture, while higher-wage earners are more concerned with environmental and design aspects of the furniture. Despite the target group, brand remains an important aspect, when choosing pieces of furniture, and it is almost essential for a furniture manufacturer to make the customers aware of the brand through different furniture expositions.106 Overall the competitive rivalry in the industry is high.
4. Threat of Substitutes There is no direct substitute for furniture in terms of its usability. We could say that a substitute for wooden furniture is metal furniture, or that a substitute for high-end furniture might be a low-cost alternative. In this sense, competitive products on the furniture markets are substitutes for each other, which only supports the claim that competitive rivalry is high in the furniture industry. Significant threat is a focus on lower-end of the market because of the affordable housing initiatives, which is in a way important factor to consider, as the higher-end furniture might be replaced by lower- end one.
As we mentioned before, the buyer switching costs are low due to many available alternatives on the market. So, if we consider types of furniture, or furniture brands, to be a substitute
102 http://www.thefreelibrary.com/Market+competition+forces%3A+a+study+of+the+Chinese+case+goods...- a0172 382657, 06.05.2014 103 “Market competition forces: a study of the Chinese case goods furniture industry.”, http://www.freepatentsonline.com/article/Forest-Products-Journal/172382657.html, 09-03-2016 104 https://www.linkedin.com/pulse/5-famous-furniture-industry-zones-china-victor-yao, 2016-3-9 105 “China’s Furniture Market”, p. 4-8 106 “China’s Furniture Market”, p.6
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 for each other, then the buyer is able to switch between them relatively easy. Again, as we mentioned, the customer loyalty is low, unless it is a particular brand that they can relate to. The product differentiation is quite high, given 50.000 furniture manufacturer with different lines of furniture.
Quality depreciation is very important for the customer, whether it is an average-wage earner or high-income earner. Consumers attach most importance to quality and style, when purchasing furniture. Even price is less important than the quality. This means that the standard product quality is set to high, and it would be very difficult for a company with low quality furniture to compete in such market.107 Overall, threat of substitutes is moderate to low.
5. Threat of New Entry The power of the raw-material suppliers, such as wood, might come to such extent, when they decide to enter the industry on the production end, which is a significant threat, as these have a lot of bargaining power, extensive network, and a vast amount of resources.
As previously mentioned, the tariffs on furniture imports to China were significantly decreased. As the focus in the chosen market is on fashionable and trendy furniture, demand for foreign imports, especially Western furniture, increase; which supports the entry of international players. Low regulatory environment for entering this industry further supports this claim. Continuously, more players from the international market enter the Chinese furniture industry. 108
On the other side, a difference between Chinese and Western business culture is significant, and without a Chinese partner or network, it might prove very difficult to enter the industry from outside China. It is often needed to raise significant brand awareness among Chinese consumers by investing in complexes or furniture villages, which is very requiring in terms of financial expenses.109
Furthermore, the difference in legal landscape in China, compared to Scandinavia, is significant. As outlined in the PEST analysis, the economy is less stable, and there are many regulations in place. Together with decreased ease of doing business and trading across the border, this decreases the threat of new entry. Overall, the threat of new entrants is moderate.
3.2.1.3 Competitive Advantage of China in the Furniture Industry In order to analyze the position of China in the industry, the “Porter’s Diamond of National Advantage” model will be used, which illustrates the determinants of national advantage.
1. Factor Conditions As mentioned previously, China is the world’s largest manufacturer of furniture. The main reason for this is the cheap labor. The economic recession had a big influence on the Chinese
107 “China’s Furniture Market”, p.5 108 “China’s Furniture Market”, p. 7 109 Ibid
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 furniture industry. The housing crisis decrease demand for expensive furniture. At the same time, the industry was also affected by the increase in costs for labor, oil and metal.110
The cost of building a factory in China is 7 USD per square foot. 111 High end furniture production plants employ local labor force for the price of 40 cents an hour. The wage differs with the position: a general worker gets paid an average of $27.50 per day. 112 Overall, this results in a 30% lower production costs, compared to the same type of furniture plant in the US. The working schedule is from 7:30 am to 8:00 pm, including lunch and dinner breaks. A typical employee works with a team that produces 2.000 drawers a day, at a rate of one every three minutes.113 The wage starts at around 60 USD a month and, after two years of experience, it grows to 100 USD a month. They also get accommodation in a dormitory with TV and basketball court.114
A typical working environment in a Chinese factory is formed of hundreds of people. It is common that a big number of women work in these places. For example, once a piece is completed to be crafted, it moves on to spraying where 19 stations and 300 workers wait to do their job. This is twice as much workforce as in a typical US factory.115
2. Related and Supporting Industries One important supporting industry is real estate. This is a major segment driving demand in the furniture industry. The property market registered a boom in 2013 and since then, authorities have enforced a number of measures to restrict the urge to buy between the populations.116 However, by 2014 these measurement were reduced and in the beginning of 2016 the payments needed for real estate purchases were cut down along with the transaction taxes.117 The banking system also participating in these easiness measures by cutting down the lending rates, making real estate appealing for investors.
The purpose of all of these measure was to solve the issue of many unsold properties in smaller cities but resulted instead in an increase in prices in the big urban areas. For example, in Shanghai October 2015, it has been noted a price index increase of 8.31% in second-hand housing.118
Hence, it can be concluded that the real estate bubble is growing in China. For the high end furniture, this can be both a positive and a negative aspect. A positive aspect is that the demand for high end and luxury property has increased. This means that buyers are not investing more in their
110 http://factsanddetails.com/china/cat9/sub61/item1107.html, 27-03-2016 111 Ibid 112 http://www.economist.com/news/briefing/21646180-rising-chinese-wages-will-only-strengthen-asias-hold- manufacturing-tightening-grip, 27-03-2016 113 http://factsanddetails.com/china/cat9/sub61/item1107.html, 27-03-2016 114 Ibid 115 Ibid 116 http://www.bloomberg.com/news/articles/2016-03-02/china-s-real-estate-frenzy-is-back-as-shenzhen-prices- surge-50, 16.05.2016 117 Ibid 118 http://www.globalpropertyguide.com/Asia/China/Price-History, 16.05.2016
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 properties and hence in the decoration of it. However, a negative aspect can be that the real estate bubble resulted in property price increase for all real estate, not only luxury properties. Hence, some buyers might have to cut down on the decorating budget for the sake of buying the property.
3. Firm’s Strategy, Structure and Rivalry China is a country where culture plays an important role in the structure of a company. Looking at the Power Distance levels, with an 80% rank, the relationship between subordinate and superiors is notably polarized. Formal authority has a big influence on individuals and sanctions are perceived as a positive leadership and initiative practice.119 Therefore, local organizations will have a high hierarchical structure, with clearly defined work responsibilities and authority.
Looking at the individualism dimension, it can be noted that with a rank of 20, hiring and promotions are highly influenced by the relationship with the individual.120 Close in-groups (e.g. family) will receive preferential treatment compared to outsiders.
This shows that sometimes the employees in a company might not necessarily be the one with the highest skills for the job. Furthermore, relationships at work also depend to differentiation between group belonging; out-groups often receive a hostile treatment. This emphasizes that creation of groups and the entire team work collaboration depends to the relationships between the employees.
In general, the Chinese society is success driven. Families and leisure time will often be sacrificed to work.121 This shows the availability of employees to work until late in the night in the pursuit of success and high work performance.
Ambiguity is perceived as comfortable in the Chinese society, the population being highly adaptable and entrepreneurial.122 By 2013, revenues of stated-owned enterprises raised 6 ties compared to 2012, whereas the ones of non-state owned enterprises had risen by 18 times.123 The number of family-owned/private-owned companies outweighs the one of state-owned enterprises. Trial and error is a common practice especially between youngsters who are trying to establish their own business.124 This is a danger for local organizations for which competition is always on the rise.
Considering Hofstede’s Indulging dimension, we can observe that China is a rather restrained society.125 This means that cynicism and pessimism are a common practice and restrain themselves from satisfying their desires. This can also be noticed in the workplace where behavior is restrained by norms.
119 https://geert-hofstede.com/china.html, 16.05.2016 120 Ibid 121 Ibid 122 Ibid 123 http://www.forbes.com/sites/tseedward/2016/04/05/the-rise-of-entrepreneurship-in-china/#491fc9556d61, 16.05.2016 124 Ibid 125 https://geert-hofstede.com/china.html, 16.05.2016
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087
Overall, by looking at the organizational structures of enterprises in China we can sum up the following leanings:
- Managerial models in the private sector are family oriented, with routines are rules. Top leaders are the one who run the company’s path, with a top-down communication approach.126 Organizational structures tend to be traditional with small variation according to business requirements. There is a high hierarchical control and command. Growth is the responsibility of the few leaders. In general, leaders need to have a very good cultural understanding and to be able to adapt to rapid market change.127 At the same time, they need to implement global standards while adapting to local conditions. Payment is highly connected to performance.
- Another important practice in the corporate environment that needs to be mentioned is the ability to take work outside the workplace. Taking a work discussion outside the office is a common practice in China and is the fundament of building trust and a strong business relationship. Business partners often negotiate business at restaurants after work and inviting a business partner out for dinner is common. Furthermore, while trying to negotiate a deal, western companies will often have to go out to many social events with Chinese business people before they can even open the discussion of the negotiation. Building relationships in China is a very important and long process and Western companies need to have a very good understand of it in order to succeed.128
3.2.2 Competitors Analysis It is no wonder that, with such a big market size of the furniture industry, China shelters fierce competition in the segment. Between local and Western brands constantly trying to enter the market, it can be hard to choose the desired type of furniture.
As mentioned previously, one of the biggest challenges for brands entering the Chinese market is to cope with piracy. This is a general concern, no matter the size or strength of the brand. The "copycat store" is a new trend of piracy. The trend appeared as a response to the middle class's growing demand for branded-name products. Faking just the goods is not enough anymore. The new trend goes to the extent of copying the look, feel and service of big and successful Western brands.129
3.2.2.1 11 Furniture The furniture industry is also experiencing the penetration of this trend. 11 Furniture store is a direct replica to the IKEA stores. Situated in the city of Kunming, the store copies the entire concept of IKEA, from its yellow and blue color scheme to the mock-up rooms, chair design and even the
126 http://www.taplowgroup.com/Portals/0/Templates/Leadership%20Effectiveness%20In%20China.pdf, 16.05.2016 127 Ibid 128 https://www.b2binternational.com/publications/chinese-marketing-selling/, 16.05.2016 129 https://sites.google.com/site/ikeastrat/home/competition, 13.05.2016
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 small pencils find everywhere in the store.130 In the 10.000 square meter and four-storey, the entire brand experience is copied.
One difference between the two stores is that 11 Furniture sells Chinese minced pork and eggs in the cafeteria instead of the Swedish meatballs. Another difference is that the furniture found inside the shop is made-to-order and not flat-packed like in IKEA.131
The customers are aware that there is a difference between the two concepts: "At the real IKEA, the layout is much neater and the decorations are laid out properly, you really can't compare them" However, some of them choose to buy furniture from this kind of store due to convenience: " I thought of shipping their products from the real IKEA store by cargo, but I thought that would be too troublesome so I came here".132
The growing demand of branded furniture pushes manufacturers to come up with new solutions to satisfy the demand. 11 Furniture is filled with replicas of the IKEA furniture. The store took advantage of the opportunity that there were no IKEA stores in the region. IKEA has 9 stores in China at the moment, hence it cannot reach all of its customers. Taking into account the size of the country and the costs implied to ship furniture across it, suppliers found it easier to replicate the IKEA offerings and hereafter fulfill the demand gap.133
All in all, 11 Furniture is a direct competitor to IKEA. The store competes on cost and also on satisfying the demand in the area where the original store cannot reach.
3.2.2.2 Hola Home Furnishing One of the fiercest competitors is the brand Hola Home Furnishing. The company was established in Taiwan in 1997.134 Hola's product lines include household kitchen appliances (small electronics, tables, kitchen appliances etc), storage furniture (lamps and storage appliances), Textile and bath (bedroom appliances, curtains, tablecloths, carpets etc.).135In order to meet all needs of consumers, the brand created three lines: HOLA design, HOLA home and HOLA selection.
HOLA design is an exclusive line dedicated to the consumers who want exclusively designed home furniture. International fashion designers are used for these lines and the products vary according to the seasonal trends.136 HOLA home is a line built around the classic style. The products are meant to fit each home space. HOLA selection has different products with different styles, all under a limited edition. The line also offers a big variety of discounts in order to offer the consumer the chance
130 http://www.dailymail.co.uk/news/article-2021607/First-fake-Apple-stores-China-fake-Ikea-shop-Kunming.html, 13.05.2016 131 Ibid 132 Ibid 133 https://sites.google.com/site/ikeastrat/home/competition, 13.05.2016 134 http://listofcompanies.co.in/hola-home-furnishings-co-ltd/, 13.05.2016 135 Ibid 136 http://www.hola.com.tw/about/, 13.05.2016
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 to combine a bigger variety of products in a fun and innovative way. 137 Therefore, it can be noticed that the three lines cater to all consumers’ demand, from highly exclusive home furniture to discount priced appliances.
50% of the store's products are imported. In stores, customers can benefit of free consulting services for an easy home layout. Moreover, a Tailored Furniture Linen service is meant to provide a higher level of personalization for the customers. This includes all kinds of specialized furniture fabrics such as curtains, couches covers and many others.138
HOLA furniture has a broader presence in China, compared to IKEA, both in terms of stores density in the cities and catering to "blind spots" on the market. In order to increase their level of competitiveness, HOLA put high efforts in becoming more efficient. These efforts include: shortening new product updates time, speeding up the design creation process in order to meet demand during special festivals, and enlarging their portfolio of goods.139
Another highly important strategic decision that HOLA took was to expand their presence in big shopping malls in downtown.140 This brings them the advantage of benefiting of the big customer flow from the malls. At the same time, this decreases the time of opening a new store, as they don't have to build the space from scratch. Furthermore, malls are often placed in the inside area of the city and consumers don't need to travel to the outside area to buy their furniture as in the case of IKEA. This gives HOLA the opportunity to attract the consumers who are not willing to travel to the IKEA suburban stores.
3.2.2.3 TMall TMall is a B2C online platform that focuses on high-quality brand name goods. The website was launched in 2008 as an answered to the increasing demand for top-quality products.141 Hence, TMall is pursuing to offer a premium shopping experience for the sophisticated Chinese consumers. In 2012, for the house decorating and furniture market, the platform recorded 3.400 billion RMB sales, a 324% growth for the year.142This shows the increasing importance of e-commerce as a sales channel.
TMall is the largest B2C retail platform in Asia.143 Sellers have the chance to establish their storefront on the platform, a practice similar to having their own B2C website. They also have a high flexibility in terms of design to operations and fulfillment and logistics.144
137 http://www.hola.com.tw/about/, 13.05.2016 138 Ibid 139 https://sites.google.com/site/ikeastrat/home/competition, 13.05.2016 140 Ibid 141 http://alibabagroup.com/assets2/pdf/Alibaba_Group_Corporate_Overview_Eng.pdf, 13.05.2016 142 https://sites.google.com/site/ikeastrat/home/competition, 13.05.2016 143 http://about.tmall.com/?spm=3.6636097.0.0.yxgOqQ#place, 13.05.2016 144 Ibid
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 3.2.3 Buying Behavior Analysis In order to explore the challenges from the microenvironment brought by the consumer behavior, we are going to look at furniture buying behavior in China. For this purpose, we use the classical S-O-R model (stimulus-organism-response).
3.2.3.1 Stimuli Stimuli are represented by the information a consumer receives from the company and the surroundings. Stimuli can come from culture, social influence, reference group or the actual marketing mix of a product.
Culture is a “a way of life of a group of people--the behaviors, beliefs, values, and symbols that they accept, generally without thinking about them, and that are passed along by communication and imitation from one generation to the next.”145 Social influence is rooted in social class, as well as social networks.
Chinese culture history and the two traditional concepts, face (“mianzi”) and “guanxi”, are very important for Chinese consumers. The face concept represents the esteem obtained from others, the public image, and the personal honor gained from actions throughout the life. “Guanxi” “refers to interpersonal relationships or connections in almost every realm of life in the Chinese culture”.146
The effect of these two concepts is that the Chinese are very much concerned with the opinion of others, and what others can see. Therefore, when purchasing the furniture, the focus is not only on what the individual consumer wants, but also on what the consumers think the others will like. The idea of “losing the face”, because of a furniture that is not well perceived among the individuals from the same social group, is unacceptable. Losing a face means partly loose dignity. This is also connected to guanxi, as the relationships between individuals are the results their “faces”.147
Therefore, if a consumer finds a particular brand that is a perfect reflection of the values and “face” of people from the same reference group, they stick to the brand. This is because they relate the product, ion this case furniture, to their “face”. This supports the notion that word-of-mouth will have a significant effect on the particular company or brand performance. As mentioned previously, the loyalty towards furniture brands is overly lower, because of many available alternatives, however, if the brand has met its expectations and is of good quality, the loyalty will be strengthened. 148
Furthermore, there is a strong influence of Confucianism in Chinese culture. This is evident in the level of collectivism of the nation, in which the interests of a group will be favored (not interest of an individual). We can also see this in the mianzi concept. This also positively affects brand
145 https://www.google.dk/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=culture, 08.05.2016 146 http://www.anzmac.org/conference_archive/2006/documents/Chan_Alvin.pdf, 08.05.2016 147 http://pure.au.dk/portal-asb-student/files/86424113/Thesis_with_case_of_JYSK_2015.pdf, 08.05.2016 148 Ibid
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 consciousness.149 It has been suggested that the consumer behavior in China is, therefore, more subjective. The impact of “mianzi”, “guanxi” and the traditional Confucian cultural values is also reflected in the furniture designs desired by Chinese. Many of them will choose a traditional-styled Chinese furniture.150
Social class has an effect on the buying behavior as well. People from upper-middle to upper class will tend to prefer design and quality aspects of the furniture, as well as its eco-friendliness, while lower social classes will tend to consider the price and quality as a major aspects of decision- making, when buying furniture. The focus is more on the price part of the marketing mix. It is important to consider that even though the majority of consumers are average-wage earners from the middle class, due to the size of the population, the number of consumers in upper classes is still significant. 151
The other external considerations to buying behavior stimuli include the influences from macro-environment, such as economic and political landscape. These factors have been analyzed and described in the macro-environmental analysis, to which, you should refer for other external stimuli. We do not repeat them in this section.
3.2.3.2 Organism The organism is the actual consumer, who is affected by psychological and physiological factors, as well as perceptions and feelings. From the motivational standpoint, we can use the Maslow’s Hierarchy of Needs152 to illustrate the difference between different consumers motivation base. Avid and luxury customers from the higher-income classes are not strongly motivated by the physiological factors. This is because their basic needs are fulfilled and they do not have to worry about them. Their motivational source is primarily from the social and esteem layer of the pyramid. They buy furniture because they need it or when they want it, but when they choose it, their purchasing is guided more by style and design, so that the furniture they buy reflects their personality.153 This has a connection to the cultural influence of “mianzi” and “guanxi”.
On the other side, the lower-income earners will prefer price as the major indicator. This is because, these customers usually replace furniture only when needed. They cannot just afford to spend their income on new furniture when they want. The purchasing motivation streams from the physiological and safety level of the Maslow’s pyramid. However, the trends are changing, and research suggests that all customers are more and more concerned about the design154, which would mean a move up the pyramid.
149 http://uu.diva-portal.org/smash/get/diva2:761619/FULLTEXT01.pdf, 08.05.2016 150 “China’s Furniture Market”, p. 3 151 “China’s Furniture Market”, p. 3, 4 152 http://thepeakperformancecenter.com/educational-learning/learning/principles-of-learning/maslows- hierarchy -needs/, 09.05.2016 153 “China’s Furniture Market”, p. 2 154 Ibid
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Figure 4: Maslow’s Hierarchy of Needs155
The influence of customers’ perceptions has been mentioned previously. The main perception influencing the customers is the environmental aspect of the furniture and its design. The perceive this factor as very important, mid-to high-end customers in particular. 156 Furthermore, the perceptions of customers are shaped by the cultural aspects of “mianzi” and “guanxi”, and their previous experience with a particular brand. Learning and memory from previous experience is very important. Research had shown that if the chosen brand performs well in the customer’s eyes, and lifts up to their expectations, the customers are more likely to choose this brand again, and there is a positive correlation with the brand loyalty.157
Age also affects the individual’s perceptions and buying behavior. This has to do with income composition as well. People between ages 35-59 focus on rational values like quality, and personal efficiency. Older people are facing more financial pressure; they do not make impulsive purchases, and they tend to look mostly at efficiency and price. Young people, aged 17 to 24, are more influenced by design and marketing channels, like advertising. They also tend not to have preferences. People between ages 24 and 34 attach a lot of importance to the price, practicality and brands. Younger people find it easier to access the channels, and are very individual. This is due to the fact that the majority of younger people is not yet in a relationship, and are still pursuing their own visions.158
155 http://thepeakperformancecenter.com/educational-learning/learning/principles-of-learning/maslows-hierarchy -needs/, 09.05.2016 156 “China’s Furniture Market”, p. 3 157 http://pure.au.dk/portal-asb-student/files/86424113/Thesis_with_case_of_JYSK_2015.pdf, 08.05.2016 158 Ibid
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 3.2.3.3 Response The response stage represents the actual consumer buying decision process from the problem recognition to the post-purchase evaluation.159
1. Problem Recognition The problem is recognized based on the consumer need or as a response to the stimuli from the environment. As mentioned before, customers from the higher end of the market focus on satisfying not only the functional need (furniture piece), but also social needs, and needs for change, due to the level of their income. On the other side, the lower end consumers focus mostly on satisfying the functional need at affordable price. But the design is increasing in importance, as mentioned before.
External stimuli is very influential. Especially advertising and exhibitions can attract customer loyalty. This is very important, as because of the number of available alternatives, loyalty tends to be low, and advertisement is a good way to reach out to the customers.160 Furthermore, the importance of online marketing channels is growing as well.161Other external stimuli is described in the stimuli section, and macro analysis.
2. Information Search Consumers search information from internal and external sources. The internal information comes from memory, experiences and perceptions. This was already presented in stimuli, and it is worth to mention again that is a consumer buys a product, and is satisfied with its performance, the loyalty is increased162, therefore memory and experiences have a significant influence in the buying process.
There is several external information that consumer searches. As mentioned in previously, the cultural and reference influence is significant. Furthermore, for the consumers are affected by the word-of-mouth communication, through their family, friends, and social peers. 163
People aged 17 to 24 are sad to be significantly affected by the channels such as advertising, and together with the 24 to 34 age group have high level of access to channels. Virtual and offline networks are also very important for the younger Chinese that buy furniture. It is also noticed that the importance of social and digital media among the mass-middle class has increased, as they are early adopters of new technology, and are continuously searching for new alternatives. These customers also purchase online.164
The high-end consumers like to purchase in specialty outlets. For them the importance of TV advertising, as well as catalogues, when searching for information about new furniture, is high.
159 http://theconsumerfactor.com/en/5-stages-consumer-buying-decision-process/, 09.05.2016 160 “China’s Furniture Market”, p. 4-8 161 “China’s Furniture Market”, p. 7 162 http://pure.au.dk/portal-asb-student/files/86424113/Thesis_with_case_of_JYSK_2015.pdf, 08.05.2016 163 Ibid 164 Ibid
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They follow fashions and are more willing to purchase international brands. 165 Furthermore, consumers also attend the furniture malls, marts and exhibitions to search for furniture. Furniture villages, or commercial complexes are also becoming increasingly popular marketing channels. It is important for the consumer that the offline and online stores are connected for better search of information.166
3. Alternative evaluation After the information is collected, the customers evaluate, which is the best alternative. For customers from lower and average income groups, the decision is made mostly based on objective characteristic like price and quality, but they take some subjective characteristics, like not losing the “face” of the opinion of their social group, into account as well. The furniture that fulfills these criteria will be in the evoked set for these customers.167
On the other side, consumers from high-income group base their decisions on mostly subjective criteria. These include the trendiness/ fashionability of the furniture piece, their feeling about the furniture and how much the furniture reflects these feelings, and also they are affected by their family outlook. Objective criteria like price is not important, while quality remains significant decider. This is because, as they are willing to pay more for furniture, they expect a good quality performance as well. If quality is low and trendiness as well, the furniture falls into the inept set for these customers.168
4. Purchase decision The actual buying decision can be influenced further, even though the consumer already had selected a set of evoked alternatives. Customers can change their decision based on the experience, when purchasing goods. As mentioned before, the average-earners are likely to buy online, and this channel is very important. If, for example, the online purchasing site of a furniture distributor/retailer is not working, when they are trying to buy, the customers may switch to another online provider, as their loyalty also tends to be lower.
High-income earners like to buy at specialty stores. The physical evidence is very important here. This is because, high-end furniture consumers are likely to be affected by factors such as personal experience with the sales stuff, as well as fashionability of the store, and the overall store experience. 169 Purchase decision is also based on the external stimuli and organism criteria outlined above.
5. Post-purchase behavior The actual performance of the furniture product will have an influence on the future buying behavior. Consumer are more likely to be loyal, if the particular furniture piece satisfies their expectations. Furthermore, the evoked set of alternatives in the future will be narrower, and through
165 http://pure.au.dk/portal-asb-student/files/86424113/Thesis_with_case_of_JYSK_2015.pdf, 13.05.2016 166 “China’s Furniture Market”, p. 4-8 167 http://pure.au.dk/portal-asb-student/files/86424113/Thesis_with_case_of_JYSK_2015.pdf, 13.05.2016 168 Ibid 169 Ibid
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 word-of-mouth, they will share their experience with their peers. When they perceive the purchased brand as superior, they are likely to buy the brand again.170
The after-sales repair and maintenance service is very important for the Chinese consumers. A survey conducted by the Hong Kong Trade Development Council shows that the after- sales repair and maintenance service score 90% in the degree of importance.171
3.3 Most Influential External Factors To answer the first working question, external macro and micro environmental factors influencing the Scandinavian furniture companies in China, we categorize them as opportunities or threats below.
3.3.1 Opportunities The main opportunities in the external environment are: 1. Increase in number of households contributing to growth in furniture industry; 2. Government spending focused on increasing public welfare, leading to an increase in consumer spending; 3. Drop in furniture import tariffs; 4. Increase in real estate trading resulting in higher demand for furniture; 5. Scandinavian brands are considered special, and demand for Western types of furniture is increasing.
3.3.2 Threats Among the most significant threats on the Chinese furniture market are: 1. Less political stability and government effectiveness than in Scandinavia; 2. High level of bureaucracy and business inefficiencies; 3. Slow-down of the economic growth; 4. High exchange rate risk; 5. High customer bargaining power and low switching costs; 6. High industrial fragmentation and competitive rivalry; 7. Great difference in business culture; 8. Network advantage of Chinese manufacturers; 9. Low level of trademark and copyright protection leading to the copying of design by the local manufacturers; 10. Lower brand loyalty; 11. Very high cultural difference and purchasing behavior between China and Scandinavia. 12. High level of promotion is required, which might be too expensive for such a big market as China.
170 http://uu.diva-portal.org/smash/get/diva2:761619/FULLTEXT01.pdf, 08.05.2016 171 “China’s Furniture Market”, p. 4-8
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 4 Company Cases 4.1 JYSK 4.1.1 Pre-Entry Introduction and History JYSK is a global furniture retailer. The company sells “everything for home” in more than 2300 stores around the world. JYSK employs approximately 20.000 people in 41 countries including “Denmark, Norway, Sweden, Finland, Poland, the Czech Republic, Hungary, the Netherlands, Slovakia, Germany, Austria, Switzerland, Iceland, Canada, Greenland, the Faroe Islands, Estonia, Latvia, Lithuania, Ukraine, Kosovo, Bulgaria, Kazakhstan, Romania, France, Great Britain, Slovenia, Macedonia, Croatia, Italy, Spain, Bosnia-Herzegovina, China, Serbia, Indonesia, Armenia, Montenegro, Greece, Singapore, Albania and Vietnam. “172
JYSK was founded in 1979, when the founder, Lars Larsen, opened the first company store in Aarhus. The store was so successful that the company opened another 2 stores within a month. From this success, the local furniture company became a global concern with 3 subsidiaries: JYSK NORDIC, DÄNISCHES BETTENLAGER and JYSK FRANCHISE.173
Following the success in Denmark, the first Dänisches Bettenlager store was established in Germany in 1984. In the same year, JYSK Franchise opened a store in Greenland. 2 years later, another franchise is opened in Faroe Islands. In 1987, Lars Larsen became a TV personality, and build the story of JYSK for its customers. At the same time another store is opened in Iceland. Continuous success of the advertisement and store openings led to more store openings in Sweden, Germany, United States, Finland, Latvia, Russia, Canada, Poland and Austria, and eventual closing of stores in Russia and United States, between 1990 and 2000. After 2000, there were more store openings in Europe, leading to a bold step of opening a store in Dubai in 2007, and 2 new stores were open in China in 2010.174
Strategy before entering China/Global Strategy The old strategy of JYSK was focused on the target group of middle class customers. The stores were bigger (1000-1500 sq.m.), and were located within the city area outside of the downtown. The main channels for promotion were posters and the company’s webpage. The prices ranged from low to high, but in comparison with other furniture retailers, the prices were at lower level. The product range was big, as the concept was “everything for home”. The level of product quality and design was mostly low. 175 This concept appeals to a wide range of customers, and still prevails in Europe.
Expansion is in the heart of JYSK’s strategy. There are three values undermining this strategy, which shows that the growth strategy is supported and based on employees: 1. “Tradesman- Service minded, cost conscious, reliable, goal-oriented and professional. 2. Colleague- Helpful, mutual respect, flexible, open, honest and straightforward and positive.
172 http://jysk.com/about-jysk, 13.05.2016 173 http://jysk.com/history-jysk-group, 13.05.2016 174 Ibid 175 http://pure.au.dk/portal-asb-student/files/86424113/Thesis_with_case_of_JYSK_2015.pdf, 13.05.2016
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3. Corporate Governance- committed, loyal , cooperative, the right and duty to speak up and JYSK ambassador.”176
4.1.2 Entry Entry Mode JYSK entered China in 2010 by opening their own store and later a distribution centre in Shanghai. This means that the chosen entry mode was direct entry through their own store. The advantage is that a high level of control is possible for JYSK, on the other side the investment required by this entry mode is much higher than for example export modes. 177 Furthermore, there is a higher level of risk connected to the possible loss of financial resources invested in the store. The original plan was to set up a big chain of 500 stores in China. However, this did not happen, as the profit was negative and the expectations about Chinese market were not fulfilled.178
Problems JYSK entered China with the same concept, as the one implemented in Europe. Low priced and low quality products for a wide range of customers. This concept does not work for China. Chinese were not willing to buy cheap and low quality products from an unknown foreign brand. Instead they prefer prestige products from abroad. Another problem was that the Chinese customers were not interested in all available product lines. 179This resulted in underwhelming performance of JYSK on the Chinese market, with negative profits and stopped store expansion.
4.1.3 Post-Entry New Strategy As JYSK noticed that not all products were desired by Chinese customers, they took a better look at the market. Bases on their analyses, they focused their assortment on bedrooms and sleeping, because Chinese customers were not interested in other products. So that, JYSK started to rebrand in China. They now sell mattresses, pillows, comforters and bed linen. As mentioned before, the Chinese customers were also not interested in low cheap furniture from abroad. JYSK removed the lowest cost products, and focused on the products in the more upscale category. 180
The old strategy focused on mass market and only 10 -15 % of new products were designed for the Chinese customers. The global JYSK strategy was applied to the Chinese market, where it was not appropriate, and this led to so many marketing and branding problems. The company wanted to be cheap, but the local competitors were cheaper, and more known. Also the customer did not understand the JYSK concept. 181
176 http://www.jysk.com/jysk-values, 13.05.2016 177 http://www.ooi.dk/dbc2015/10jysk.pdf, 13.05.2016 178 http://www.suitable.dk/News/Re-branding-JYSK-in-China/, 13.05.2016 179 http://pure.au.dk/portal-asb-student/files/94844406/JYSK_in_China.pdf, 13.05.2016 180 http://www.suitable.dk/News/Re-branding-JYSK-in-China/, 14.05.2016 181 http://www.ooi.dk/dbc2015/10jysk.pdf, 14.05.2016
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As the director of business development in JYSK, Rami Jensen, said: “In Europe, we appeal to all segments of society, but we realized that the conventional JYSK concept is too broad for the Chinese to understand”, Chinese consumers perceived the difference in the price as confusing. This is because, once they saw the cheap product lines, they did not trust the more expensive goods, JYSK offered. Therefore, the new concept was developed, called the “Scandinavian sleeping”. The company collected input from its Chinese employees about what they associate with Scandinavia. Then JYSK built the concept around Scandinavian values, including good materials, trust and purity. The company also needed to increase its credibility, and therefore, they decided to make a short film that is shown to the customers in stores. This film shows how the pillows and comforters are made in Denmark. 182
The target market was also narrowed in China. The focus is no longer on mass market, but on “women aged between 25 and 45 who are educated and have westernized attitude from the high-end group” This target group is more keen on quality and values,, and the Scandinavia is a symbol of good quality furniture for them.183
JYSK also changed its stores. The aim was to make them smaller, more Nordic looking, with wooden floors and shelves. The in-store advertising shows the posters and photographs of the Nordic scenery, Danish fields and windmills, with white, grey, earthen and pastel colors. The main focus was on making the stores look very light and calm. They also use the fact that JYSK is the official purveyor of the royal Danish court, which gives the brand more uniqueness, trust and experience. 184Finally, the store location was changed; the stores were moved to the big shopping malls, which is one of the reasons, why the stores are smaller now. 185
As JYSK wants to appeal to a higher end of the market, they also changed the design. Their original design is very simple and plain, which work for Europe, but not China. JYSK acquired IDEmøbler and ILVA in 2013, which have a more unique design, since they are high-end furniture brands in Denmark. Therefore it is expected that the acquisition of these two brands will have an impact on the Chinese JYSK furniture design.186
The rebranding also included an online competition. This should increase sales within the new target market, and strengthen the brand, as well as create more trust among customers. This project started in mid 2014 and continued to 2015 due to its success. 187
182 http://www.suitable.dk/News/Re-branding-JYSK-in-China/, 14.05.2016 183 http://pure.au.dk/portal-asb-student/files/86424113/Thesis_with_case_of_JYSK_2015.pdf, 14.05.2016 184 http://www.suitable.dk/News/Re-branding-JYSK-in-China/, 14.05.2016 185 http://pure.au.dk/portal-asb-student/files/86424113/Thesis_with_case_of_JYSK_2015.pdf, 14.05.2016 186 Ibid 187 http://www.ooi.dk/dbc2015/10jysk.pdf, 14.05.2016
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4.1.4 Financial Situation To evaluate the financial situation of JYSK, we are going to look at 5 year financial development in the statement of comprehensive income and balance sheet. We are not going to evaluate the cash flow statement, as it was not included in the annual reports of JYSK or other locations. Then we are going to look at financials from Chinese operation. The statements below are the statements for JYSK A/S.
Figure 5: JYSK- Statement of Comprehensive Income for the Financial Years 2009/10-2013/14 in ‘000 DKK188 2013/14 2012/13 2011/12 2010/11 2009/10 Turnover 3.275.573,00 3.049.174,00 2.920.682,00 2.847.013,00 2.771.868,00 Cost of Goods Sold (1.981.085,00) (1.887.106,00) (1.795.415,00) (1.703.348,00) (1.661.356,00) Other Operating Income 624.834,00 585.890,00 308.339,00 115.785,00 107.524,00 Other External Costs (490.380,00) (461.986,00) (452.749,00) (441.694,00) (452.172,00) Gross Income 1.428.942,00 1.285.972,00 980.857,00 817.756,00 765.864,00
Labor costs (498.393,00) (458.627,00) (436.953,00) (436.254,00) (439.242,00) EBITDA* 930.549,00 827.345,00 543.904,00 381.502,00 326.622,00
Depreciation (53.699,00) (68.260,00) (69.101,00) (69.722,00) (69.121,00) EBIT** 876.850,00 759.085,00 474.803,00 311.780,00 257.501,00
Financial Income 8.087,00 7.948,00 12.555,00 10.383,00 16.615,00 Financial Expenses (7.971,00) (13.735,00) (15.493,00) (8.711,00) (7.956,00) EBT*** 876.966,00 753.298,00 471.865,00 313.452,00 266.160,00
Taxes (at 24-26%) (216.393,00) (190.940,00) (120.208,00) (78.346,00) (66.570,00) Net Profit 660.573,00 562.358,00 351.657,00 235.106,00 199.590,00 * Earnings before Interest, Tax, Depreciation and Amortization **Earnings before Interest and Tax ***Earnings before Tax
188 Self-made, data collected from “JYSK Årsrapport 2010/11”, “JYSK Årsrapport 2012/13” and “JYSK Årsrapport 2013/14”
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Figure 6: JYSK- Statement of Financial Position for the Financial Years 2009/10-2013/14 in ‘000 DKK189 Assets: 2013/14 2012/13 2011/12 2010/11 2009/10 Property, Plant and Equipment 13.035,00 51.762,00 104.673,00 159.131,00 213.970,00 Trucks and Cars 19.314,00 19.638,00 21.106,00 19.999,00 20.293,00 Leasehold Improvements and Other 10.868,00 10.645,00 11.467,00 9.755,00 8.611,00 Total Tangible Assets 43.217,00 82.045,00 137.246,00 188.885,00 242.874,00
Total Intangible (Financial) Assets 821.784,00 53.418,00 52.409,00 51.234,00 51.008,00
Total Non-Current Assets 865.001,00 135.463,00 189.655,00 240.119,00 293.882,00
Inventory 810.810,00 623.596,00 673.955,00 679.330,00 574.433,00
Sales and Other Services 496.305,00 137.256,00 162.123,00 37.546,00 24.428,00 Affiliated Businesses 26.847,00 23.903,00 22.578,00 522.052,00 222.439,00 Other Receivables 683.315,00 1.390.054,00 973.733,00 3.577,00 2.929,00 Prepayments and Other 22.759,00 17.737,00 10.802,00 5.685,00 6.744,00 Total Receivables 1.229.226,00 1.568.950,00 1.169.236,00 568.860,00 256.540,00
Cash 76.242,00 162.569,00 66.608,00 89.702,00 134.226,00
Total Current Assets 2.116.278,00 2.355.115,00 1.909.799,00 1.337.892,00 965.199,00
Total Assets 2.981.279,00 2.490.578,00 2.099.454,00 1.578.011,00 1.259.081,00 Liabilities: 2013/14 2012/13 2011/12 2010/11 2009/10 Share Capital 500,00 500,00 500,00 500,00 500,00 Retained Earnings 1.131.502,00 1.670.929,00 1.108.571,00 565.668,00 830.562,00 Proposed Dividend 1.200.000,00 - 250.000,00 500.000,00 - Total Equity 2.332.002,00 1.671.429,00 1.359.071,00 1.066.168,00 831.062,00
Provisions for Deffered Tax - - - 3.017,00 5.662,00 Total Non-current Liabilities - - - 3.017,00 5.662,00
Creditors 30.677,00 62.774,00 96.190,00 81.325,00 14.899,00 Prepayments from Customers 10.841,00 10.749,00 11.754,00 12.317,00 12.110,00 Suppliers of Goods and Services 219.332,00 158.840,00 179.475,00 148.135,00 164.535,00 Affiliated Businesses - - - 6.573,00 948,00 Corporate Tax 220.476,00 431.379,00 296.603,00 110.056,00 53.928,00 Prepayements 4.045,00 5.713,00 8.131,00 9.197,00 14.197,00 Other Debt 163.906,00 149.694,00 148.230,00 141.223,00 161.740,00 Total Current Liabilities 649.277,00 819.149,00 740.383,00 508.826,00 422.357,00
Total Debt 649.277,00 819.149,00 740.383,00 508.826,00 422.357,00
Total Liabilities & Equity 2.981.279,00 2.490.578,00 2.099.454,00 1.578.011,00 1.259.081,00
189 Self-made, data collected from “JYSK Årsrapport 2010/11”, “JYSK Årsrapport 2012/13” and “JYSK Årsrapport 2013/14”
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Profitability Looking at the statement of comprehensive income gives us an idea of the overall financial situation of JYSK. We can see that the revenue has been increasing over the 5 years. The reason, why we do not include the financial year 2014/15 is that the annual statement was not available for this year. So did the operating profit (EBIT) and net profit. If we look at the profitability ratios, we can see that the operating profit margin (EBIT divided by the turnover) increased on 4,27% on average (arithmetic average of changes in operating margin). Net profit margin increased significantly in the financial year 2012/13. This year seems to be very profitable for JYSK in general. We see an increase in all profitability indicative ratios. However, we see a slowdown in turnover and profit increase, as they increased much less than in the previous year.
If we look at the changes between the years 2009/10 and 2010/11, we can only see a slight increase in profitability, while both return on investment (EBIT divided by capital employed- equity and non-current liabilities) and return on equity (net profit divided by total equity) decreased. ROE shows us that the profit generated on the investment of shareholders’ funds decreased. The change in ROI shows us that the percentage returns on the total funds have decreased as well. We could wonder, whether these changes have anything to do with the fact that the Chinese store was open in 2010. However, we cannot be certain about that. Furthermore, there is a negative development in the changes of ROI and ROE for the last evaluated year, which shows that the profitability on funds decreased again.
Table 7: JYSK- Profitability Ratios190 2013/14 2012/13 2011/12 2010/11 2009/10 Gross Profit Margin 43,62% 42,17% 33,58% 28,72% 27,63% GPM Change 1,45% 8,59% 4,86% 1,09% -
Qperating Profit Margin 26,77% 24,89% 16,26% 10,95% 9,29% ORM Change 1,87% 8,64% 5,31% 1,66% -
Profit Margin 20,17% 18,44% 12,04% 8,26% 7,20% PMR Change 1,72% 6,40% 3,78% 1,06% -
Return on Equity 28,33% 33,65% 25,87% 22,05% 24,02% ROE Change -5,32% 7,77% 3,82% -1,96% -
Return on Investment 37,60% 45,42% 34,94% 29,16% 30,77% ROI Change -7,81% 10,48% 5,78% -1,61% -
190 Self-made, data collected from “JYSK Årsrapport 2010/11”, “JYSK Årsrapport 2012/13” and “JYSK Årsrapport 2013/14”
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Efficiency Furthermore, the inventory for the last year is much higher. The arithmetic average of the inventory levels from previous years is 214.779,75. The last year’s inventory is more than 3 times the average one, which can signal problems in turning inventory into cash. We can approach this by looking at the inventory turnover (turnover/inventory) and inventory holding period (inventory times 12 months divided by the cost of goods sold). The inventory turnover shows that the inventory is sold and replaced on average 4,46 times. We can see the negative changes around the year when the Chinese store was open, which would make sense as the supply of JYSK exceeded the demand in China, which could have increased the level of overall inventory. The inventory holding period expresses the average length of time between purchase and sale of inventory. In this case the lower the holding time the better. Holding time has increased in the same year, when inventory turnover decrease, which makes sense. We can see that every time the inventory turnover decreases, the holding period increases. This signalizes further inventory issues in 2013/14.
We can look at the average time it takes for JYSK to pay its trade suppliers by looking at the trade payables payment period (trade payables, in our case “supplier or goods and services”, divided by the cost of goods sold). This ratio shows that that again remained relatively unchanged with minor improvements in 2010/11 and 2012/13, however there is an increase in 2013/14. On the other side, we can measure the average time it takes to receive the payments from customers by looking at the trade receivable payment period (trade receivables, in our case “sales and other services”, divided by the turnover). This ratio also shows little deviation, but an increase in 2013/14, which further signalizes problems in this year.
Table 8: JYSK- Efficiency Ratios191
2013/14 2012/13 2011/12 2010/11 2009/10 Inventory Turnover 4,04 4,89 4,33 4,19 4,83 ITR Change -0,85 0,56 0,14 -0,63 -
Inventory Holding Period 4,91 3,97 4,50 4,79 4,15 IHP Change 0,95 -0,54 -0,28 0,64 -
Trade Payables Payment Period 1,33 1,01 1,20 1,04 1,19 TPP Change 0,32 -0,19 0,16 -0,14 -
Trade Receivables Payment Period 0,16 0,05 0,06 0,02 0,01 TRP Change 0,11 -0,01 0,04 0,00 -
191 Self-made, data collected from “JYSK Årsrapport 2010/11”, “JYSK Årsrapport 2012/13” and “JYSK Årsrapport 2013/14”
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Liquidity Regarding the balance and liquidity of JYSK, we are going to look at current ratio (current assets divided by current liabilities) and acid ratio (also known as quick ratio, calculated as current assets minus inventory divided by the current liabilities). The current ratio shows us whether the short-term assets (e.g. cash) are available to be turned into cash and pay-off. This ratio is quite high for JYSK with a minor decrease in 2011/12. But overall, the liquidity showed by this ratio seems good. However, we must not forget that we do not know, how fast the current assets, like inventory, can be turned into cash. The acid ratio is essentially the same as current ratio, but it deals with this problem, as it excludes the inventory. The quick ratio shows a positive development except for the last evaluated year, which means that the liquidity is on a good level.
Table 9: JYSK- Liquidity Ratios192 2013/14 2012/13 2011/12 2010/11 2009/10 Current Ratio 3,26 2,88 2,58 2,63 2,29 CR Change 0,38 0,30 -0,05 0,34 -
Acid ratio 2,01 2,11 1,67 1,29 0,93 AR Change -0,10 0,44 0,37 0,37 -
Financial Leverage If we look at the balance sheet, we notice one interesting fact. That is the fact that there are no long-term (non-current liabilities) after the year 2011/12. This means the company is financing itself through current-liabilities, which decreases the long-term financial risk connected to the debt.
Finally, to access the company’s leverage, we will look at the gearing ratio (non-current liabilities divided by equity, in our case non-current liabilities are provisions), and interest cover (EBIT/interest payable). The gearing ratio measures how much of the company’s assets is paid for by the long-term debt. As we can see, due to the fact that there is no long-term debt, the gearing ratio is zero after 2010/11.The interest cover shows the ability of JYSK to cover the interest payable. As e can see the interest cover is satisfactory with minor negative change from 2010/11 to 2011/12. The overall leverage of JYSK is good.
Table 10: JYSK- Leverage Ratios193 2013/14 2012/13 2011/12 2010/11 2009/10 Gearing ratio 0,00% 0,00% 0,00% 0,28% 0,68% GR Change 0,00% 0,00% -0,28% -0,40% -
Interest Cover 110,01 55,27 30,65 35,79 32,37 IR Change 54,74 24,62 -5,15 3,43 -
192 Self-made, data collected from “JYSK Årsrapport 2010/11”, “JYSK Årsrapport 2012/13” and “JYSK Årsrapport 2013/14”
193 Self-made, data collected from “JYSK Årsrapport 2010/11”, “JYSK Årsrapport 2012/13” and “JYSK Årsrapport 2013/14”
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Operation in China As mentioned previously, the store opened in China was not as successful as expected. The profit after tax was -12,9 million RMB in 2010, -25,9 million RMB in 2011, and -32,3 in 2012. This is on average a loss of 23,7 million RMB, and a total loss of 71,1 million RMB for JYSK. This is not very visible in the financial statements, however some indicators about the inventory, ROI, and ROE show a negative development. This is probably because the loss in China was compensated by gains in other markets. It is unfortunate that the cash flow statement was not available, as it this loss would probably be reflected in the cash position of the company.194
4.1.5 Conclusion Strengths As the main strength, we would suggest the financial situation, in terms of leverage and profitability. This is because, as JYSK has so much available financial resources, they could afford to rebrand. A company with fewer resources could worsen its overall financial situation, if such losses, as the one in the JYSK case, occurred. Furthermore, the company is a global brand with a lot of international experience, which gives it an advantage compared to companies that have no global presence. Finally, the association of the brand with the royal Danish court, and the story about Scandinavian quality, as well as store concept centered on around this help improve customer's perception of JYSK credibility. The short film played in the stores strengthens this further.
Weaknesses The original focus was on a very broad category of products for a very wide range of customers. This did not work due to lack of credibility, and not sufficient understanding of the price differences between cheaper and more expensive products of JYSK. JYSK brand was not a well-known brand in China, therefore the brand value was very low. The width of product portfolio caused problems with customer’s perception. Brand identity was missing and it was reflected in the profit.
Strategy The new strategy that seem to have improved the brand image and performance included narrower product portfolio, removal of the cheapest products, change of store concept to smaller stores in the shopping malls with Danish/Nordic decor and wooden aspects. The target group was changed from to a specific age group of women from higher-end of the market. The appeal to the whole mass- middle class was refrained from. The product lines in focus are bedding and sleeping under the concept of “Scandinavian sleeping”, as JYSK found out, this is the possibility in the market. Customers were not interested in other JYSK product lines.
194 http://www.ooi.dk/dbc2015/10jysk.pdf, 14.05.2016
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 4.2 IKEA 4.2.1 Pre-Entry Introduction and History IKEA is an internationally known home furnishing retailer, it is one of a few business miracles in 20th century. It has grown rapidly since it was founded in 1943, when it started with a little stationery business by mail order. After more than 70 years’ development, IKEA is the world’s largest furniture retailer, recognized for its Scandinavian style; there are 217 retail chain stores world widely in 33 countries, employing 80,000 employees. In 1947, IKEA put furniture into their product series; in 1951, the first IKEA catalog has been published; the company started to design their own furniture in 1955. The majority of IKEA’s furniture is flat packed, which was first tried in 1956, ready to be assembled by the consumer. This allows a reduction in costs and packaging. In 1958, IKEA created the first shopping mall in Ålmhult; children’s furniture was introduced in 1997. There are 18 stores in China right now, the first was opened in the shopping mall in 1998 in Shanghai. In 2015, the biggest sales came from China, Germany, USA, France, UK and Sweden. IKEA carries a range of 9500 products, including home furniture and accessories. This wide range is available in all IKEA stores and customers can order much of the range online through IKEA’s website. Low prices are one of the cornerstones of the IKEA concept, and help increase customers propensity to buy from IKEA. The low price strategy is coupled with a wide range of well designed, functional products. IKEA’s products are focused on every lifestyle and life stage of its customers, who come from all age groups and types of households.195
Since it was founded, IKEA has always had a concern for people and the environment. The IKEA vision “to create a better everyday life for the many people” puts this concern at the heart of the business. IKEA has responded to the public’s rising concern for sustainability in its choice of product range, suppliers, stores and communication. It has also spotted business potential in providing sustainable solutions. IKEA’s concern for people and the environment encourages it to make better use of both raw materials and energy. This keeps costs down and helps and company to reach its green targets and have an overall positive impact on the environment.196
Strategy before entering China/Global Strategy At the beginning of the venture, IKEA decided to stand with “the majority” of the household consumers. It means that IKEA’s products need to satisfy the consumers with different needs, tastes, dreams, and income in their daily life. According to this, IKEA’s product positioning is: low price, exquisite, durable household goods. IKEA’s business philosophy is to provide as many customers as possible, who can afford well-designed, functional, inexpensive household items.197
All products IKEA sells were designed independently by IKEA; products style is distinctive from others. IKEA emphasizes products of a unique style, which are simple, nature, fresh, and well-designed. IKEA has insisted on its own design of all products and has its own patents. IKEA has emphasized
195 http://www.ikea.com/ms/en_GB/about_ikea/the_ikea_way/history/, 16.05.2016 196 http://www.ikea.com/ms/en_GB/about-the-ikea-group/people-and-planet/index.html, 16.05.2016 197http://wenku.baidu.com/link?url=VYn0K6fMzoMzrIXEJkHK8uslkJQjObs5ESDTb7n8mlyAt07O73BKE4vBZIPbFowU 8bYuPgjAVs1CbUHr7fyhkc3jmYsKs0ySA1ss9gyjEaC ---IKEA case research
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 persistently on exquisite design, practical and durable goods. 198 IKEA offers products in a low-price category, and it constantly innovates to reduce costs. The innovation is connected to cooperation with OEM manufacturers. Furthermore, global production management, and logistics system are conductive to reducing costs together with the flat packaging. 199
IKEA has large stores that are painted in the blue and yellow traditional Swedish colors. The stores have a path shown by arrows according to which the customers should move around in the store, In order to see all of the IKEA. IKEA also has display rooms, which are designs for the whole room on display for customers to see. The stores have a display part, and a warehouse. IKEA also offers food in its stores.200 Regarding promotion, IKEA has catalogue, which is an important part of the strategy, greatly contributing to the sale of IKEA products. The catalogue is published yearly and it is free. In store promotion is very important as well, and the store layout is predominant for this type of advertising. Walking though IKEA on a defined path will show you all other products that you were not planning to buy. The catalogue is the same globally, except for minor differences. Media choices vary by market.201
4.2.2 Entry Entry Mode IKEA entered China in 1998, and used joint-venture as an entry mode to the Chinese market. IKEAA did this to overcome political risk and gain competitive advantage over international furniture retailers that are foreign to China. This is a common IKEA internationalization policy, and it is advantageous as it reduces strategic risk, because the local suppliers can give input into political, legal, financial, and other threats to the IKEA concept. Some of the stores are company-owned subsidiaries, like the one in Hong-Kong. 202 This entry strategy gives IKEA more control over the store that the joint ventures, however, it is more expensive, and resource demanding.
Problems The joint venture was a good starting point for IKEA to test the market. IKEA was not as successful as expected, and based on that the company identified several challenges. The product price that was considered very low in Europe was far from that in China. There, the price was higher than average, and local competitors were able to produce cheaper furniture than IKEA. At the time, the problem was also that IKEA did not produce in China, and as such, Chinese companies had advantage over labor costs, and they did not have to pay high import taxes (at the time import taxes were quite high). 203
198 http://wenku.baidu.com/view/55b043cba1c7aa00b52acbd6.html, 16.05.2016 199 http://www.wsj.com/articles/ikea-cant-stop-obsessing-about-its-packaging-1434533401, 16.05.2016 200 http://www.slideshare.net/riddhimachopra/ikea-case-study, 16.05.2016 201 https://books.google.dk/books?id=YreJ42YFjb0C&pg=PA173&lpg=PA173&dq=ikea+promotion&source=bl&ots= IuFAURN9bj&sig=jAK8U98j8Q3jUXpfKbPCxejcUrE&hl=en&sa=X&ved=0ahUKEwj6953und7MAhUBsywKHYmHAvsQ6 AEIRjAJ#v=onepage&q=ikea%20promotion&f=false, 16.05.2016 202 https://www.theseus.fi/bitstream/handle/10024/17554/jamk_1198235756_7.pdf?sequence=2, 16.05.2016 203 http://www.businesstoday.in/magazine/lbs-case-study/how-ikea-adapted-its-strategies-to-expand-in- china/story/196322.html, 16.05.2016
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Furthermore, the target group was supposed to be people from low-income groups, but for them the price of the furniture in IKEA was not low, or affordable. High price was one of the greatest issues for IKEA in China. Apart from that, the catalogue strategy did not work in China, as it provided the competitors with an opportunity to copy IKEA’s furniture. This indeed happened, like described in section 4.2.1. IKEA could not do anything about this, as the intellectual property and trademark laws were not strongly implemented in China. 204
Another problem was that Chinese people hate to assemble their own furniture, which was in direct contrast to the flat packaging of IKEA. The store location (normally in suburbs in Europe) could not work either for China, where not all people have cars. Finally, Chinese did not see IKEA, as a low-cost durable furniture brand, but more like an aspirational brand.205
4.2.3 Post-Entry New Strategy IKEA quickly realized that its European strategy will not work for the Chinese. First of all, the product price was decreased. Its level was set to affordable, in order to meet the demands from the new target, the middle-class market. In order to be able to do that, IKEA also build some factories in China, so that, the company would be able to benefit from not import tariffs, lower labor costs. They also started to do quality inspections closer to the manufacturing to save on repair costs. 206
Now, 30% of global products come from Chine, while 65% of Chinese products come from local factories. This has to do with the product design as well. IKEA realized that the simple and clean design did not work perfectly in China, and therefore, some products were added to the portfolio, and many were redesigned to fit the Chinese consumers. For example, chopsticks were added, and many products were designed to reflect the Western style of Scandinavia. This is because, IKEA found out that it’s Scandinavian heritage is a strength. Furthermore, because the living space in China is much smaller than in Europe, IKEA adapted its apartment displays in the stores to be smaller, and they even include a balcony section, as many of the apartments in China do.207
The store location was moved closer to the metro/railway links, as most people do not have a car, but use public transportation instead. In contrast to JYSK case, IKEA is building larger stores in China than in Europe, primarily because the number of visitors at the moment is huge (28.000 during a day in Shanghai).208 To solve the problems with delivery, packaging and assembly, IKEA offers local delivery to home, as well as long-distance delivery to the biggest cities for a fee. Furthermore, IKEA has taxi lanes, and changes the “assemble yourself” concept by offering free basic assembly services. 209
204 http://www.businesstoday.in/magazine/lbs-case-study/how-ikea-adapted-its-strategies-to-expand-in- china/story/196322.html, 16.05.2016 205 Ibid 206 http://in.reuters.com/article/ikea-expansion-india-china-idINDEE92603L20130307, 16.05.2016 207 http://www.chinabusinessreview.com/ikea-with-chinese-characteristics/, 16.05.2016 208 http://in.reuters.com/article/ikea-expansion-india-china-idINDEE92603L20130307, 16.05.2016 209 https://www.theseus.fi/bitstream/handle/10024/17554/jamk_1198235756_7.pdf?sequence=2, 16.05.2016
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Finally, IKEA also realized that they need to offer their employees cheaper goods off the shelves for customers, which is not very usual in mature markets like, for example, Europe. 210There has also been a change in advertising strategy. As the catalogue did not work in China, IKEA focused on advertising in Chinese social media, micro-blogging (Weibo) to target the youth, and the company also strengthen its in-store advertisement. 211 This is because the in-store experience is very important for successful word-of-mouth promotion that is widespread among Chinese.
At present, there are 18 IKEA stores in China, among them, there are three in Shanghai, two in Beijing, “in the past year, we have successfully opened in Wuhan, Hangzhou and Xi’an, and we are delighted to see the good performance and potential development of these emerging markets. We will keep the pace of expansion” IKEA China retail CEO Zhu Changlai said.212 In 2015, IKEA China achieved the sales record of 10 billion 500 million RMB, the market continued to grow strong. Present shopping malls, the new shopping malls, and multi-channel business development are having a good performance. IKEA China is committed to providing consumers with value of quality products, and will be integrated into the business strategy for sustainable development.213
4.2.4 Financial Situation To analyze the financial situation of IKEA, we are going to look at the statement of comprehensive income and the statement of financial position between 2010 and 2015. The we are going to look at the Chinese operation. The reason why we do not look into previous years is that the information is not available for this period.
Figure 7: IKEA- Statement of Comprehensive Income for the Financial Years 2011-2015 in ‘000 EUR214* 2015 2014 2013 2012 2011 2010 Turnover 32.658.000,00 29.293.000,00 28.506.000,00 27.628.000,00 25.173.000,00 23.539.000,00 Cost of Goods Sold (18.221.000,00) (16.372.000,00) (15.786.000,00) (15.723.000,00) (13.773.000,00) (12.454.000,00) Gross Income 14.437.000,00 12.921.000,00 12.720.000,00 11.905.000,00 11.400.000,00 11.085.000,00
Operating costs (10.388.000,00) (9.128.000,00) (8.709.000,00) (8.423.000,00) (7.808.000,00) (7.888.000,00) EBIT* 4.049.000,00 3.793.000,00 4.011.000,00 3.482.000,00 3.592.000,00 3.197.000,00
Financial Income and Expense 299.000,00 352.000,00 81.000,00 427.000,00 165.000,00 76.000,00 EBT*** 4.348.000,00 4.145.000,00 4.092.000,00 3.909.000,00 3.757.000,00 3.273.000,00
Taxes (at 17-21%) (822.000,00) (801.000,00) (775.000,00) (695.000,00) (781.000,00) (577.000,00) Profit before MI 3.526.000,00 3.344.000,00 3.317.000,00 3.214.000,00 2.976.000,00 2.696.000,00
Minority Interest (MI) (14.000,00) (15.000,00) (15.000,00) (12.000,00) (10.000,00) (8.000,00) Net Profit 3.512.000,00 3.329.000,00 3.302.000,00 3.202.000,00 2.966.000,00 2.688.000,00 *Earnings before Interest and Tax **Earnings before Tax
210 http://jiaju.sina.com.cn/news/20151218/6083435581793436255.shtml, 16.05.2016 211 http://www.businesstoday.in/magazine/lbs-case-study/how-ikea-adapted-its-strategies-to-expand-in- china/story/196322.html, 16.05.2016 212 http://usa.chinadaily.com.cn/epaper/2014-08/20/content_18455422.htm, 16.05.2016 213 http://jiaju.sina.com.cn/news/20151218/6083435581793436255.shtml ---IKEA China news 214 Self-made, data collected yearly summaries 2011-2015, available at http://www.ikea.com/ms/en_AU/this-is- ikea/reports-downloads/index.html; 16.05.2016
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Figure 8: IKEA- Statement of Financial Position for the Financial Years 2009/10-2013/14 in ‘000 EUR215 Assets: 2015 2014 2013 2012 2011 2011 Property, Plant and Equipment 22.840.000,00 17.322.000,00 17.036.000,00 17.264.000,00 16.173.000,00 15.982.000,00 Other Fixed Assets 2.515.000,00 2.984.000,00 2.493.000,00 2.672.000,00 2.416.000,00 2.683.000,00 Total Non-current Assets 25.355.000,00 20.306.000,00 19.529.000,00 19.936.000,00 18.589.000,00 18.665.000,00
Inventory 5.498.000,00 4.927.000,00 4.257.000,00 4.664.000,00 4.387.000,00 3.415.000,00 Receivables 2.500.000,00 2.548.000,00 2.193.000,00 2.270.000,00 2.077.000,00 2.238.000,00 Cash and Securities 16.659.000,00 16.886.000,00 16.000.000,00 17.878.000,00 16.828.000,00 16.955.000,00 Total Current Assets 24.657.000,00 24.361.000,00 22.450.000,00 24.812.000,00 23.292.000,00 22.608.000,00
Total Assets 50.012.000,00 44.667.000,00 41.979.000,00 44.748.000,00 41.881.000,00 41.273.000,00 Liabilities: 2015 2014 2013 2012 2011 2011 Equity 34.896.000,00 31.608.000,00 29.202.000,00 29.072.000,00 25.411.000,00 22.841.000,00
Long-term Liabilities 2.061.000,00 1.550.000,00 1.898.000,00 2.523.000,00 3.123.000,00 4.296.000,00 Other Non-current Liabilities 1.971.000,00 1.858.000,00 1.567.000,00 1.625.000,00 1.469.000,00 1.325.000,00 Total Non-current Liabilities 4.032.000,00 3.408.000,00 3.465.000,00 4.148.000,00 4.592.000,00 5.621.000,00
Short-Term Liabilities 4.880.000,00 4.397.000,00 4.763.000,00 6.814.000,00 7.107.000,00 7.724.000,00 Other Payables 6.204.000,00 5.254.000,00 4.549.000,00 4.714.000,00 4.771.000,00 5.087.000,00 Total Current Liabilities 11.084.000,00 9.651.000,00 9.312.000,00 11.528.000,00 11.878.000,00 12.811.000,00
Total Debt 15.116.000,00 13.059.000,00 12.777.000,00 15.676.000,00 16.470.000,00 18.432.000,00
Total Liabilities & Equity 50.012.000,00 44.667.000,00 41.979.000,00 44.748.000,00 41.881.000,00 41.273.000,00 Profitability Let us start by looking at the simplified statement of comprehensive income. We can see an increase in revenue and profit throughout the years. The situation is the same for the company’s operating profit (EBIT). The tax rate varies between 17 and 21%. This would signalize a stable financial growth of IKEA. However, it important to consider the costs, and the proportion of profits compared to the revenue. Both, the operating margin (EBIT divided by turnover) and the profit margin (net profit divided by turnover) have been decreased, which might mean an increase in costs. The operating margin decreased on by 0,24%, while the profit margin decreased 0,13% on average (arithmetic average). This shows that the company revenue is increasing, but so are the costs for IKEA, therefore IKEA might be seeking more and more lower cost options (supplier, services…).
To have an idea about the profit generated on the investor’s fund, we shall look at the return on equity (net profit divided by equity) first. As we can see below, the ROE have decreased over the years, 0,34% on average. If we look at the return on investment(EBIT divided by capital employed- equity and non-current liabilities), this has been decreasing as well. Return on investment shows us that the profitability on funds is decreasing. ROI decreased 0,17% on average. Even though, the tendency here is negative, we cannot certainly say that the financial situation of IKEA is getting worse. This is because, if we look carefully, we can observe that the changes are relatively small.
215 Self-made, data collected yearly summaries 2011-2015, available at http://www.ikea.com/ms/en_AU/this-is- ikea/reports-downloads/index.html; 16.05.2016
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Table 11: IKEA- Profitability Ratios216 2015 2014 2013 2012 2011 2010 Gross Profit Margin 44,21% 44,11% 44,62% 43,09% 45,29% 47,09% GPM Change 0,10% -0,51% 1,53% -2,20% -1,81% -
Operating Profit Margin 12,40% 12,95% 14,07% 12,60% 14,27% 13,58% ORM Change -0,55% -1,12% 1,47% -1,67% 0,69% -
Profit Margin 10,75% 11,36% 11,58% 11,59% 11,78% 11,42% PMR Change -0,61% -0,22% -0,01% -0,19% 0,36% -
Return on Equity 10,06% 10,53% 11,31% 11,01% 11,67% 11,77% ROE Change -0,47% -0,78% 0,29% -0,66% -0,10% -
Return on Investment 10,40% 10,83% 12,28% 10,48% 11,97% 11,23% ROI Change -0,43% -1,45% 1,80% -1,49% 0,74% -
Efficiency Now, we will turn our attention to the efficiency of IKEA. First to evaluate the inventory, we will comment on inventory turnover (turnover/inventory) and inventory holding period (inventory times 12 months divided by the cost of goods sold). We see an increase in inventory over the years. The average level of inventory increase is 11% (average of the percentage increases in inventory levels), which might mean that the company is less able to transfer inventory into cash. The inventory turnover has also decreased over the past two years. The inventory holding period, which shows us how long it takes on average between purchase and sale of inventory has increased also in the past two years. This supports the claim that IKEA might have too much inventory. On the other side, it might mean, IKEA is planning further expansions, and s preparing the necessary inventory.
Table 12: IKEA- Efficiency Ratios217
2015 2014 2013 2012 2011 2010 Inventory Turnover 5,94 5,95 6,70 5,92 5,74 6,89 ITR Change -0,01 -0,75 0,77 0,19 -1,15 -
Inventory Holding Period 3,62 3,61 3,24 3,56 3,82 3,29 IHP Change 0,01 0,38 -0,32 -0,26 0,53 -
Trade Payables Payment Period 0,34 0,32 0,29 0,30 0,35 0,41 TPP Change 0,02 0,03 -0,01 -0,05 -0,06 -
Trade Receivables Payment Period 0,08 0,09 0,08 0,08 0,08 0,10 TRP Change -0,01 0,01 -0,01 0,00 -0,01 -
216 Self-made, data collected yearly summaries 2011-2015, available at http://www.ikea.com/ms/en_AU/this-is- ikea/reports-downloads/index.html; 16.05.2016 217 Self-made, data collected yearly summaries 2011-2015, available at http://www.ikea.com/ms/en_AU/this-is- ikea/reports-downloads/index.html; 16.05.2016
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087
IKEA’s ability to pay its suppliers can be measure by the trade payables payment period (trade payables, in our case “other payables”, divided by the cost of goods sold). This ratio shows that the average time length it takes IKEA to pay its suppliers is increasing. However, we made an assumption that the “other payables” mean the suppliers, which might not be true.
To look at the customers payments, we comment on the trade receivable payment period (trade receivables, in our case “receivables”, divided by the turnover). The ratio is relatively constant with only minor changes, which signalizes that the average time does not change a lot (the standard deviation is only 0,01).
Liquidity To evaluate the liquidity of IKEA, we conducted and will comment on the current ratio (current assets divided by current liabilities) and acid ratio (also known as quick ratio, calculated as current assets minus inventory divided by the current liabilities).
The current ratio shows that the ability of IKEA to turn current assets into cash to pay off the current liabilities has slightly decreased. However, its level is still satisfactory, and shows liquidity. This includes inventory, for which we do not know, how fast it can actually be turned into cash. Therefore the acid ratio accounts for this, as it excludes the inventory. This ratio also decreases, and is lower than the current ratio, but as it is above 1, the liquidity is not extremely high (compared to e.g. JYSK, or previous years), but is satisfactory.
Table 13: IKEA- Liquidity Ratios218 2015 2014 2013 2012 2011 2010 Current Ratio 2,22 2,52 2,41 2,15 1,96 1,76 CR Change -0,30 0,11 0,26 0,19 0,20 -
Acid ratio 1,73 2,01 1,95 1,75 1,59 1,50 AR Change -0,29 0,06 0,21 0,16 0,09 -
Financial Leverage To assess the financial leverage of IKEA, we cannot make an interest cover(EBIT/interest payable), as in the financial statements the income receivable and payable are not split. However, as we can see in figure 8, the financial expenses and income are always positive, which shows that the financial income exceeds the financial expense. This is a positive indicator. Looking at the gearing ratio (non-current liabilities divided by equity), we can see that there are only minor changes the ratio, which means low variability in how much of the assets are paid for by the long-term debt. To give a better overview of the total debt, we measured the debt/equity ratio(total debt/total equity), which shows that there has been a slight increase in the proportion of total debt in the company’s financial structure over the past year, but a significant gradual decrease over the whole period. Overall, the leverage is satisfactory compared to previous years.
218 Self-made, data collected yearly summaries 2011-2015, available at http://www.ikea.com/ms/en_AU/this-is- ikea/reports-downloads/index.html; 16.05.2016
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Table 14: IKEA- Leverage Ratios219 2015 2014 2013 2012 2011 2010 Gearing ratio 0,12 0,11 0,12 0,14 0,18 0,25 GR Change 0,01 -0,01 -0,02 -0,04 -0,07 -
D/E 0,43 0,41 0,44 0,54 0,65 0,81 D/E Change 0,02 -0,02 -0,10 -0,11 -0,16 -
Operation in China Despite the underwhelming performance of the first opened store, IKEA succeeded with its new strategy. The expansion in China was rapid. In 2004, for example, the Chinese revenue grew by 40% from the previous year.220 China remains the fast growing market for IKEA, with 11,2% growth, and more expectations for the future revenue growth. The revenue growth in local currency is 8,9%.221
4.2.5 Conclusion Strengths IKEA’s strengths lie in the availability of financial resources, and in the company’s ability to adapt. When the European strategy did not work in China, IKEA’s fast response and redesign of stores, and product portfolio helped develop revenues in the Chinese market. IKEA is also an international brand, with a lot of market knowledge, and a good access to suppliers. As the 65% of Chinese goods come from Chinese supplier, this network strength gives IKEA an advantage over exporters of foreign goods. Finally, IKEA has a string international growth and success, at the moment, especially on the Chinese market. Western Scandinavian heritage increases the positive brand image.
Weaknesses The price of IKEA goods was too high for the Chinese, even though it was low for European customers. General strategy with clean and plain style for the lower class did not work. The other weakness was the distance from the Chinese market in terms of supplier, which was solved. We can basically say that the overcame their weaknesses. IKEA seems to have problems with the financial efficiency, but as we made assumptions (see above), it is hard to be certain with that.
Strategy As China remains the fastest growing market for IKEA, we can say the redesigned strategy worked. With lower prices, store concept that is more centered around the Chinese way of living (smaller flats, balconies), store location closer to public transport and enhancement of social and online advertisement, IKEAS improved its profitability in China. Furthermore, refocusing on the middle class, and providing it with necessary services (assembly, transport, etc.), the brand image was improved, and IKEA is very successful in China.
219 Self-made, data collected yearly summaries 2011-2015, available at http://www.ikea.com/ms/en_AU/this-is- ikea/reports-downloads/index.html; 16.05.2016 220 http://www.businesstoday.in/magazine/lbs-case-study/how-ikea-adapted-its-strategies-to-expand-in- china/story/196322.html, 16.05.2016 221 http://www.marketwatch.com/story/ikea-full-year-sales-rise-112-on-china-boost-2015-09-10, 16.05.2016
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 4.3 BoConcept 4.3.1 Pre-Entry Introduction and History The company was established in Denmark in 1952 by two craftsmen, Jens Ærthøj Jensen and Tage Mølholm, in Herning. The first name was Ærthøj-Jensen and Mølholm Møbelfabrik and their goal was that furniture should be high quality but also functional and good value for money. Simplicity is at the foundation of the furniture design, all built under the influence of Danish design. Even though everything is produced in Denmark, BoConcept’s inspiration is from big cities around the world. “New meets old, fast meets slow and chaos meets calm - no matter where your home is, a home has to feel like home”222 - this is the essence of BoConcept.
Important milestones in the history of the company are 1970 when BoConcept number of employees doubled to 40 and beds were added as part of the collection, among wall systems and bookcases. In 1976 the name was changed to Denka in an effort to become a major player on the international markets along with the introduction of a higher customization for each market.223 In 1993, the first BoConcept Brand Store opened in Paris. At the same time, other 7 stores are opened around France and USA. The year 2002 is a very important one as the company changed from being production oriented to concept holder for an international retail chain.224 The BoConcept University is established in 2004 for employee training and in 2013 the company opened its third distribution centre in Shanghai to support the expansion in Asia.225
Strategy before entering China/Global Strategy In 2013, BoConcept collaborated with Mercedes-Benz on a new furniture line and a design for a Smart car. This collaboration emphasizes the similarities in the target group of the two companies: late 20s to 50s urbaners with high income.226BoConcept’s products are made for an urban lifestyle and targeted at the affordable luxury segment. Design and quality are in the centre of attention and the high customization level allows differentiation from competition.227 BoConcept positioning as affordable luxury was also selected in an effort to reduce price competitiveness.
At the moment, the company has a total of 230 franchise stores and 90 studios, all showing their global identity. Due to their big international presence, BoConcept also engages in branding, supply chain management, sales optimization and store management in an effort to support their global retailing stores.228 Each franchisee receives support from the headquarters such as customer service, visual merchandise, IT and general business intelligence.229
222 http://www.boconcept.com/et-ee/boconcept/about-boconcept/the-history, 223 http://www.boconcept.com/et-ee/boconcept/about-boconcept/the-history, 224 http://www.boconcept.com/et-ee/boconcept/about-boconcept/the-history, 225 http://www.boconcept.com/et-ee/boconcept/about-boconcept/the-history, 226 https://sites.google.com/site/ikeastrat/home/competition, 227 http://www.ifu.dk/en/service/news-and-publications/news/ifu-invests-with-boconcept-in-china, 228 https://sites.google.com/site/ikeastrat/home/competition, 229 http://www.boconcept.com/da-dk/boconcept/franchise/support,
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087
Figure 9: Bo-Concept Positioning230
Inside their stores, the company offers an interior decorating service. The customers can book a visit at home and have professional advice for how to best decorate their home. The service also includes 3D drawings.231 The products are meant to be customizable, coordinated and affordable. It can be adapted to the wishes of the consumer, have all details closely considered and provides a great value for the purchaser. The company’s mission is: “Through passionate and persistent performance we make customized and coordinated design furniture and accessories affordable to the urban-minded customer.” Its vision is: “To make BoConcept no. 1 brand within urban interiors.”232
In order to assure alignment throughout all business activities, the company has a set of value to guide them. These are: - “Respect! - Always show you care - Think smarter - Always look for the better solution - Play the team - Always use your freedom responsibly - Love city life - Always know what's going on.”233
230 file:///Users/Andreea/Desktop/Handelsbanken%20Retail%20Seminar.pdf , page 5 231 https://sites.google.com/site/ikeastrat/home/competition, 232 http://www.boconcept.com/en-gb/boconcept/about-boconcept/vision-mission-and-values, 233 Ibid
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087
As mentioned previously, the first BoConcept brand store was opened in 1993, in France. Two years after, in 1995, the company entered China.234 This shows that, before entering the Asian market, the company was not too developed. Their global expansion strategy was to sell the BoConcept franchise. Hence, they did not handle the burden of how and where to get the products on the new market. However, they assured that the franchisee has the power to participate in the future growth of the brand’s concept.235 4.3.1 Entry Entry Mode Simon Lichtenberg, the founder of Trayton Group in China, is the one who bought the BoConcept franchise for the Chinese market. Therefore, the chosen entry mode is franchise. In 1995 he started selling the imported Danish designed furniture products in Shanghai through furniture department stores and malls. The sales during the first year were very profitable for Trayton, accounting $3.6 million.236 Many young urban middle-class families who were just recently starting to buy housing, welcomed the contemporary and innovative design of BoConcept.237
In 1997, with an income of $6 million in sales, Simon established his own furniture factories in Shanghai.238 This step gave him the freedom to sell the products also to other parts of China such as Beijing, Guangzhou and Hong Kong. By the end of the year, he already established 14 BoConcept outlets and the profits were approximately 10% of the sales.239
Problems Even though the BoConcept products were received very good on the Chinese market, problems soon started to appear. Simon brought the furniture on the market at a point when there were not so many competitors. However, by the end of 1997, 3000 other furniture companies established their shops in Shanghai. These companies were selling all types of furniture, from classic Chinese to mid 18th century European furniture. Furthermore, 12 other Chinese companies were manufacturing products similar to BoConcept’s design.240
By 1998, Simon Lichtenberg was in a big struggle with other local “copycats” who were selling cheaper replicas of his products. Some of these “copycats” were even using the BoConcept logo in their showroom, making customers believe that they were buying authentic BoConcept products. With company catalogs and models of BoConcept displayed in local stores and BoConcept marketing materials printed under the name of local players, it was hard to establish anymore, which were the
234 http://archive.fortune.com/magazines/fortune/fortune_archive/2000/10/02/288473/index.htm, 235 http://www.boconcept.com/da-dk/boconcept/franchise/your-own-store, 236 http://business2articles.blogspot.dk/2011/10/simon-lichtenberg-founder-and-ceo-of.html#more, 237 Ibid 238 Ibid 239 http://archive.fortune.com/magazines/fortune/fortune_archive/2000/10/02/288473/index.htm, 240 http://archive.fortune.com/magazines/fortune/fortune_archive/2000/10/02/288473/index.htm,
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 authentic Danish-designed products. As a result, the sales dropped by 10% in 1998, compared to 1997.241
Fighting for intellectual property was a big struggle for Simon, due to the unclear laws for intellectual property and delays in enforcement. Furthermore, the sanctions are minimal - confiscation, warnings, public apology and, in the best case, a fine which is however negotiated. However, this did not stop Simon. He hired the services of the private investigation firm Pinkerton to get in touch with the responsible for these matters, the State Administration for Industry and Commerce. (SAIC) These efforts were in vain due to the big numbers of departments at SAIC and low information sharing. By the end of 1998, when sales were falling more and more, Simon changed his strategy. He used to so call “guanxi” - network/connections. A friend of Simon’s knew an affluent deputy who convinced the director from SAIC that it is unfair competition to use the BoConcept brand name and logo. Lichtenberg recalls: "Their attitude was, if your furniture sells well, why wouldn't others copy it?242"
As a result, a series of raids took place and the SAIC confiscated many BoConcept catalogs. However, only a small number of “copycats” stopped making furniture resembling BoConcept’s. For this, Simon needed the help of the Shanghai patent bureau with which was another long struggle. After trying to get in contact with it from more than a year, by 1999 the patent bureau helped Lichtenberg to close down the production of five “copycats”. In June 1999 Lichtenberg filed a lawsuit against Shanghai Ornate Furniture Production, the company stealing the biggest amount of market share from BoConcept in China. However, the case was stuck in the Intermediate court for many years. The problem was that, according to a lawyer, BoConcept failed to register its patents in China within six months of registering its patents in Denmark.243
4.3.2 Post-Entry New Strategy The public attention of the case pushed Ornate to stop the production of BoConcept-like furniture design. Moreover, Simon took out his products from department stores outlets and opened his own “total living” concept stores.244 This further pushed other concept stores to stop selling knockoffs as the owners realized the illegality of this procedure and negative influence on their image. As a result of Simon’s high efforts, by 2000, the sales of BoConcept in China grew to the 1997 highs.245
In 2013, BoConcept headquarters established a new subsidiary in Shanghai. This subsidiary was created with the purpose of administration the distribution, support and development of China’s existing and possible new stores. These efforts show the increasing focus on optimization and future
241 Ibid 242 Ibid 243 Ibid 244 http://archive.fortune.com/magazines/fortune/fortune_archive/2000/10/02/288473/index.htm, 245 Ibid
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 growth. Furthermore, BoConcept started scanning potential new local partners who could aid in the expansion process of new stores.246
In 2014, a new agreement was signed with the Chinese furniture manufacturer Kinetic. This is a very well-known and successful player on the Chinese furniture market.247 The collaboration is supposed to help BoConcept open new stores in other parts of China and find new franchisees. In 2015, another collaboration was started with IFU (Investment Fund for Developing Countries) which has acquired 40% of the shares from the Chinese BoConcept company.248 The partnership is expected to add financial support as well as know-how for further growth on the market.
4.3.3 Financial Situation Again, we use statement of comprehensive income and the statement of financial position to analyze the financial situation of BoConcept. We take into consideration the financial years 2009/10 to 2014/15 for the statement of comprehensive income, and the years 2010 to 2015 for the statement of financial position. Information from when BoConcept entered China is no longer available.
Figure 10: BoConcept- Statement of Comprehensive Income for the Financial Years 2011-2015 in ‘000 DKK249* 2014/15 2013/14 2012/13 2011/12 2010/11 2009/10 Revenue 1.147.513,00 1.049.469,00 1.026.133,00 1.022.173,00 1.001.142,00 910.176,00 Cost of Good Sold (681.779,00) (600.679,00) (580.323,00) (570.614,00) (579.696,00) (538.934,00) Gross Profit 465.734,00 448.790,00 445.810,00 451.559,00 421.446,00 371.242,00
Distribution (369.358,00) (373.219,00) (346.149,00) (338.292,00) (313.653,00) (295.863,00) Administration (83.216,00) (93.465,00) (72.636,00) (75.936,00) (71.162,00) (62.040,00) Other Operating Income 1.891,00 337,00 180,00 322,00 114,00 660,00 Other Operating Expenses - (4.161,00) (7.746,00) (917,00) (1.608,00) (1.328,00) EBIT before Special Items 15.051,00 (21.718,00) 19.459,00 36.736,00 35.137,00 12.671,00
Special Items (65.795,00) - - - - - EBIT* (50.744,00) (21.718,00) 19.459,00 36.736,00 35.137,00 12.671,00
Financial Income 7.064,00 4.520,00 4.246,00 7.125,00 3.488,00 3.751,00 Financial Expenses (14.932,00) (6.534,00) (6.343,00) (4.308,00) (8.408,00) (6.832,00) EBT* (58.612,00) (23.732,00) 17.362,00 39.553,00 30.217,00 9.590,00
Taxes/ Tax profit 1.500,00 10.893,00 (6.023,00) (13.990,00) (10.535,00) (4.302,00) Net Profit (57.112,00) (12.839,00) 11.339,00 25.563,00 19.682,00 5.288,00 *Earnings before Interest and Tax **Earnings before Tax
246 Ibid 247 http://danishfurniture.dk/blog/new-partnership-to-boost-boconcepts-expansion-in-china/, 248 http://www.ifu.dk/en/service/news-and-publications/news/ifu-invests-with-boconcept-in-china, 249 Self-made, data collected yearly summaries 2009-2015, available at http://www.boconcept.com/en- us/investor-relations/annual-and-interim-reports; 16.05.2016
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087
Figure 11: BoConcept- Statement of Financial Position for the Financial Years 2009/10-2013/14 in ‘000 DKK250 Assets: 2015 2014 2013 2012 2011 2010 Goodwill and Master Rights 49.173,00 58.548,00 42.589,00 42.709,00 40.941,00 37.012,00 Software and Other 25.368,00 28.657,00 22.411,00 20.694,00 17.052,00 5.742,00 Total Tangible Assets 74.541,00 87.205,00 65.000,00 63.403,00 57.993,00 42.754,00
Land, Buildings & Leasehold Improvements 73.743,00 89.068,00 85.402,00 86.503,00 94.759,00 104.053,00 Plant, Machinery and Other Fixtures 22.260,00 25.759,00 23.698,00 31.548,00 38.475,00 48.244,00 Property, Plant and Equipment in Progress 292,00 514,00 3.504,00 2.322,00 952,00 6.859,00 Total Intangible (Financial) Assets 96.295,00 115.341,00 112.604,00 120.373,00 134.186,00 159.156,00
Financial Assets 45.893,00 46.675,00 62.600,00 60.923,00 59.380,00 58.207,00
Total Non-current Assets 216.729,00 249.221,00 240.204,00 244.699,00 251.559,00 260.117,00
Inventory 151.252,00 143.381,00 106.105,00 124.098,00 107.781,00 100.489,00 Trade Receivables 122.631,00 144.522,00 144.036,00 135.533,00 115.328,00 100.116,00 Other Receivables 23.199,00 28.406,00 21.574,00 21.867,00 22.577,00 19.642,00 Cash & Cash Equivalents 12.416,00 16.320,00 20.359,00 15.385,00 10.329,00 29.625,00
Total Current Assets 309.498,00 332.629,00 292.074,00 296.883,00 256.015,00 249.872,00
Total Assets 526.227,00 581.850,00 532.278,00 541.582,00 507.574,00 509.989,00 Liabilities: 2015 2014 2013 2012 2011 2010 Share Capital 28.621,00 28.621,00 28.621,00 28.621,00 28.621,00 28.621,00 Translation & Hedging Reserves (4.160,00) (8.074,00) (2.503,00) 870,00 (4.500,00) 761,00 Retained Earnings 132.866,00 188.897,00 201.914,00 189.657,00 169.812,00 154.168,00 Proposed Dividend - - - 5.724,00 5.724,00 - Total Equity 157.327,00 209.444,00 228.032,00 224.872,00 199.657,00 183.550,00
Provisions for Deffered Tax 12.192,00 11.747,00 44.509,00 46.613,00 46.031,00 28.932,00 Employee Debentures 10.316,00 9.484,00 1.299,00 2.674,00 2.674,00 2.674,00 Long-term Debt 66.287,00 68.940,00 45.990,00 52.093,00 62.192,00 77.541,00 Total Non-current Liabilities 88.795,00 90.171,00 91.798,00 101.380,00 110.897,00 109.147,00
Short-term Debt 51.001,00 57.924,00 26.029,00 32.076,00 44.333,00 51.771,00 Trade Payables 122.197,00 118.485,00 90.241,00 84.977,00 79.390,00 80.047,00 Prepayements from Customers 40.555,00 39.818,00 19.923,00 22.155,00 16.743,00 21.303,00 Income Tax Payable - (387,00) 7.558,00 11.014,00 736,00 10.170,00 Other Payables 66.352,00 66.395,00 68.697,00 65.108,00 55.818,00 54.001,00 Total Current Liabilities 280.105,00 282.235,00 212.448,00 215.330,00 197.020,00 217.292,00
Total Debt 368.900,00 372.406,00 304.246,00 316.710,00 307.917,00 326.439,00
Total Liabilities & Equity 526.227,00 581.850,00 532.278,00 541.582,00 507.574,00 509.989,00
Profitability Firstly, looking at the statement of comprehensive income, we can see a positive revenue development. While the revenue grew 4,82% on average yearly (average of the yearly increases), the operating profit and the net profit evolved negatively over the past two years. This could be due to an
250 Self-made, data collected yearly summaries 2009-2015, available at http://www.boconcept.com/en- us/investor-relations/annual-and-interim-reports; 16.05.2016
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 increase in cost of goods sold, and special items expenses. If we approach this proportionally, operating profit margin (EBIT divided by turnover) and profit margin (net profit/turnover) were negative for the two years due to negative operating profit. The development of those is also negative; operating profit margin decreased by 1,16% on average yearly, while profit margin decreased by 11,1% on average. This signalized financial issues for the company in last years
Let us now look at the return on equity (net profit divided by total equity). The tendency is decreasing, with average decrease of 7,83%, and negative figures for the years with negative profit. This shows that profits generated on investor’s fund are decreasing. Return on investment recorded an annual decrease of 4,99%, and again negative figures for the years with negative profits. This shows that fund profitability is significantly decreasing, and BoConcept has problems with profitability.
Table 15: BoConcept- Profitability Ratios251 2015 2014 2013 2012 2011 2010 Gross Profit Margin 40,59% 42,76% 43,45% 44,18% 42,10% 40,79% GPM Change -2,18% -0,68% -0,73% 2,08% 1,31% -
Operating Profit Margin -4,42% -2,07% 1,90% 3,59% 3,51% 1,39% ORM Change -2,35% -3,97% -1,70% 0,08% 2,12% -
Profit Margin -4,98% -1,22% 1,11% 2,50% 1,97% 0,58% PMR Change -3,75% -2,33% -1,40% 0,53% 1,38% -
Return on Equity -32,25% -10,37% 8,53% 16,34% 17,60% 6,90% ROE Change -21,88% -18,90% -7,80% -1,26% 10,70% -
Return on Investment -20,62% -7,25% 6,08% 11,26% 11,31% 4,33% ROI Change -13,37% -13,33% -5,18% -0,05% 6,99% -
Efficiency The inventory turnover (turnover/inventory) has decreased over the years, but there was a slight increase from 2014 to 2015. This means that over the years, the inventory is sold and replaced on average less times. To measure the average length of time between purchase and sale of inventory we can look at the inventory holding period (inventory times 12 months divided by the cost of goods sold). The inventory holding period has increased on average 0,8 per year, but there was a small decrease between 2014 and 2015, which is positive.
The average length of time it takes for BoConcept to pay its suppliers is measured by the trade payables payment period (trade payables divided by the cost of goods sold). This shows an increase over the years, which is, however, slight. There has been a recent decrease, which leads to a positive development. Figures below also illustrate that the trade receivables payment period (trade receivables/turnover) has recently decreased, which means the average length of time to receive
251 Self-made, data collected yearly summaries 2009-2015, available at http://www.boconcept.com/en- us/investor-relations/annual-and-interim-reports; 16.05.2016
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 customer payments have decreased, which is also positive. Overall, efficiency is lower than other players in the industry (e.g. IKEA and JYSK), and compared to the whole period.
Table 16: BoConcept - Efficiency Ratios252
2015 2014 2013 2012 2011 2010 Inventory Turnover 7,59 7,32 9,67 8,24 9,29 9,06 ITR Change 0,27 -2,35 1,43 -1,05 0,23 -
Inventory Holding Period 2,66 2,86 2,19 2,61 2,23 2,24 IHP Change -0,20 0,67 -0,42 0,38 -0,01 -
Trade Payables Payment Period 0,18 0,20 0,16 0,15 0,14 0,15 TPP Change -0,02 0,04 0,01 0,01 -0,01 -
Trade Receivables Payment Period 0,11 0,14 0,14 0,13 0,12 0,11 TRP Change -0,03 0,00 0,01 0,02 0,01 -
Liquidity Liquidity of BoConcept decreased over the years but not significantly. Current ratio(current assets/current liabilities) that measures how able BoConcept is to translate current assets into cash shows that there was a decrease in the last two years. Compared to other players (IKEA and JYSK), the current ratio is much lower, also comparative to the previous years.
The acid ratio (current assets minus inventory divided by the current liabilities) has also decreased over the past two years, but not so significantly. However, again comparatively to other players, the ratio is much lower. This means that the liquidity of BoConcept after taking the inventory out of question is lower than its competitors. Overall, the liquidity is lower than historically, and the company seems to have financial problems.
Table 17: BoConcept- Liquidity Ratios253 2015 2014 2013 2012 2011 2010 Current Ratio 1,10 1,18 1,37 1,38 1,30 1,15 CR Change -0,07 -0,20 0,00 0,08 0,15 -
Acid ratio 0,56 0,67 0,88 0,80 0,75 0,69 AR Change -0,11 -0,20 0,07 0,05 0,06 -
Financial Leverage As the EBIT development was negative in the recent years, the interest cover (EBIT/interest payable) is negative. This means that the company is not able to pay the interest on the long-term debt
252 Self-made, data collected yearly summaries 2009-2015, available at http://www.boconcept.com/en- us/investor-relations/annual-and-interim-reports; 16.05.2016 253 Self-made, data collected yearly summaries 2009-2015, available at http://www.boconcept.com/en- us/investor-relations/annual-and-interim-reports; 16.05.2016
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 from its EBIT, which might mean further borrowing. To find out, how much of the assets are paid for by the long-term debt, we can conduct the gearing ratio (non-current liabilities divided by equity). There has been an increase, which means that BoConcept has more long-term debt. This is also higher than competitors (IKEA, JYSK). As mentioned before, this might be because the profitability was negative, and the company needed finance to pay for the interest and continue its operation. This is because the equity has also decreased, because of the fall in retained earnings. This is also shown in the debt/equity ratio, which has increased.
Table 18: BoConcept- Leverage Ratios254 2015 2014 2013 2012 2011 2010 Gearing ratio 0,56 0,43 0,40 0,45 0,56 0,59 GR Change 0,13 0,03 -0,05 -0,10 -0,04 -
D/E 2,34 1,78 1,33 1,41 1,54 1,78 D/E Change 0,57 0,44 -0,07 -0,13 -0,24 -
Interest Cover -3,40 -3,32 3,07 8,53 4,18 1,85 IR Change -0,07 -6,39 -5,46 4,35 2,32 -
Operation in China In the beginning of the BoConcept franchise, the profits were significant, as mentioned before. This shows that BoConcept was very successful in China. However, due to the problems with “copycats”, the profits plunged. Because, the franchisee solved the problems with the copying at least partially, the profits started growing again in 2000.255 Following the franchise, BoConcept started acquisition of own stores, and expects a positive growth development in China.256 We could say that because previously, the stores were franchises, the revenue from them from the actual BoConcept was lower, then if it had their own stores from the beginning.
4.3.4 Conclusion Strengths An important strength is that BoConcept products have been on the Chinese market for many years and has already established brand awareness. The tough battle and success in eliminating the major “copycats” from the market is another strength that will support BoConcept in the future. Furthermore, the constant support and investments from the BoConcept headquarters is a major help for the local franchisees.
Weaknesses As a weakness we can note that, the increasing number of franchisees in China might make it hard for the headquarters to assure a distribution aligned with their brand’s concept. Also, the franchises bring less revenue to BoConcept than the own stores. Finally, the financial situation of the
254 Self-made, data collected yearly summaries 2009-2015, available at http://www.boconcept.com/en- us/investor-relations/annual-and-interim-reports; 16.05.2016 255 http://archive.fortune.com/magazines/fortune/fortune_archive/2000/10/02/288473/index.htm, 20.05.2016 256 http://connection.ebscohost.com/library-search?s=1&an=87100237, 20.05.2016
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 company got worse over the last two years, which might mean, BoConcept could have difficulties with the continuous acquisition and operation in China and globally. However, the decrease in financial profitability could also mean a great level of investment, which might turn into revenue in the future (e.g. subsidiary in China).
Strategy Overall, the strategy of BoConcept changed from imported goods on the Chinese market to local manufacturing. Furthermore, in the beginning, the Danish-designed furniture was sold through furniture department stores and malls. After big struggles with intellectual property laws, the products started being sold only through owned “total living” concept stores. Furthermore, in an effort to support growth, BoConcept headquarters invested into a new subsidiary in Shanghai and signed collaborations with new partners on the market.
4.4 Conclusion on Situation of Scandinavian Furniture Companies in China
4.4.1 Strengths One of the common strengths is the companies’ ability to change their concept in China after experiencing problems. Both JYSK and IKEA suffered from applying the global strategy to the Chinese market; however they were able to adapt, and rebrand the companies.
Furthermore, all the case companies have an advantage of having international experience in the market, and experience with internationalization. All the companies had enough financial resources at the time of the entry to China, and established international brand presence. All of the companies have been in China for a while now, which means they have some market knowledge, and for all of them Chinese market is the main growth generator.
Scandinavian origin gives the companies an advantage over the local brands, as the connection to Scandinavia gives them an image of quality and credibility. The fact that all the companies have decided to have their own stores (even BoConcept is moving towards this) means that they have more control over the operation of the stores and strategic direction. Furthermore two of the companies have established significant network in China, having their own subsidiaries, and being closer to the suppliers. IKEA’s strengths lie in the availability of financial resources, and in the company’s ability to adapt.
4.4.2 Weaknesses The global strategies of the companies are not applicable in China, which increase the strategic complexity. High level of customization and changes in product portfolio are required for China. Both JYSK and IKEA, as low-cost furniture retailers, had to adapt the price ranges for the Chinese market. BoConcept had problems with the image due to “copycats”; however, that is more of an external threat than a weakness.
Some of the case companies also show a negative development in the financial situation globally over the past couple of years, which means that the availability of resources might be decreasing. This would have negative implications not only globally, but in China as well.
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 5 Final Conclusion The previous section provides a partial conclusion on the third working question. To give a complete answer to this question, and the research question, we shall compute a SWOT model for the case companies, and comment on their strategies using the TOWS framework. When looking at the SWOT, and the weaknesses in section 4, we consider weaknesses of the global strategy, connected to the problems, the companies experienced in China. The arrows on the SWOT model show the chosen TOWS strategy.
Given the analysis in section 4.1, and the below SWOT model, we can summarize that JYSK overcame the market threats of high cultural difference, high customer bargaining power, and low loyalty by using its strengths. After the initial entry problems, the company’s financial situation allowed it to rebrand on the Chinese market. The brand image was newly built around the Scandinavian heritage, and connection to royal Danish court, which increased brand presence and loyalty.
The ability of JYSK to adapt to the market, and change the portfolio, as well as the price range shows that JYSK also overcame its weaknesses to overcome the threats. This would mean that the combination of “maxi-mini” and “mini-mini” was used by JYSK to overcome external influential factors.
Figure 12: JYSK- SWOT Model257 Strengths Weaknesses Good financial situation in terms of leverage and profitability The original price range was too broad Global brand with a lot of experience Low brand value at the time of entry Association with the royal Danish court (credibility) Too wide global product portfolio for Chinese market Only a few products customized for the Chinese market at Market adaptability time of entry Opportunities Threats Increase in number of households contributing to growth in Less political stability and government effectiveness than in furniture industry Scandinavia Government spending focused on increasing public welfare, Very high cultural difference and purchasing behavior leading to an increase in consumer spending between China and Scandinavia Drop in furniture import tariffs Great difference in business culture Increase in real estate trading resulting in higher demand for High level of promotion is required, which might be too furniture expensive for such a big market as China Scandinavian brands are considered special, and demand for Low level of trademark and copyright protection leading to Western types of furniture is increasing the copying of design by the local manufacturers High customer bargaining power and low switching costs High industrial fragmentation and competitive rivalry High level of bureaucracy and business inefficiencies Network advantage of Chinese manufacturers Lower brand loyalty High exchange rate risk Slow-down of the economic growth
We can see that the SWOT analysis for IKEA is very similar to the one of JYSK. This is because the global product and price strategy of both companies is very similar. IKEA also applied the global strategy to the Chinese market, and had to change it. IKEA, based on the huge availability of financial resources
257 Self-made based on sections 3.3 and 4.1
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087 was able to change the store locations, their promotional efforts, and change the prices, so it would fit Chinese customers, as mentioned in 4.2. IKEA also experienced problems with the concept copying, as mentioned in section 3.2.2.
The packaging and assembly strategy was also adapted to fit the Chinese market, together with the strengthening of the supplier network in China. IKEAs ability to adapt to the market shows that to overcome external challenges “maxi-mini” and mostly “mini-mini” strategy were used.
Figure 13: IKEA- SWOT Model258 Strengths Weaknesses Good overall financial situation Inappropriate price range for China Global brand with a lot of experience Wrong promotional efforts Strong supplier network in China Store location was inappropriate Packing & Assembly strategy was also inappropriate Market adaptability for China Opportunities Threats Increase in number of households contributing to growth in Less political stability and government effectiveness than in furniture industry Scandinavia Government spending focused on increasing public welfare, Very high cultural difference and purchasing behavior leading to an increase in consumer spending between China and Scandinavia Drop in furniture import tariffs Great difference in business culture Increase in real estate trading resulting in higher demand for High level of promotion is required, which might be too furniture expensive for such a big market as China Scandinavian brands are considered special, and demand for Low level of trademark and copyright protection leading to Western types of furniture is increasing the copying of design by the local manufacturers High customer bargaining power and low switching costs High industrial fragmentation and competitive rivalry High level of bureaucracy and business inefficiencies Network advantage of Chinese manufacturers Lower brand loyalty High exchange rate risk Slow-down of the economic growth
As we can see below, the situation of BoConcept is quite different from the two previous companies. The main problem was the low level of trademark and copyright that caused the copying of the brand concept and products. This problem was overcome by years of fighting the “copycats” with the use of strong franchisee network and a lot of financial resources available from the headquarters at the time of arguments.
To gain more revenue, and avoid the strategic alignment problems, BoConcept chose to switch from franchises to own stores. The acquisition should give the company less financial resources in a short-term, but could be very beneficial in terms of future profits (higher than just fees from franchises), and more control. The focus is again on “maxi-mini” and “mini-mini” TOWS strategies.
258 Self-made based on sections 3.3 and 4.2
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087
Figure 14: BoConcept- SWOT Model259
Strengths Weaknesses Establish brand awareness Franchises might cause problems with strategic alignment. Strong network through franchisees Worsening financial situation Acquisition for more control Unprotected brand equity after entry Ability to fight "copycats" Opportunities Threats Increase in number of households contributing to growth in Less political stability and government effectiveness than in furniture industry Scandinavia Government spending focused on increasing public welfare, Very high cultural difference and purchasing behavior leading to an increase in consumer spending between China and Scandinavia Drop in furniture import tariffs Great difference in business culture Increase in real estate trading resulting in higher demand for High level of promotion is required, which might be too furniture expensive for such a big market as China Scandinavian brands are considered special, and demand for Low level of trademark and copyright protection leading to Western types of furniture is increasing the copying of design by the local manufacturers High customer bargaining power and low switching costs High industrial fragmentation and competitive rivalry High level of bureaucracy and business inefficiencies Network advantage of Chinese manufacturers Lower brand loyalty High exchange rate risk Slow-down of the economic growth
Based on the partial conclusions made, “maxi-mini” and “mini-mini” strategies from the TOWS framework are used to overcome external challenging factors, and to maintain strong market position in China. There are, however, some differences between IKEA and JYSK, and BoConcept. These are mainly indicative of the global strategy. We can see that the low-cost furniture retailers, like IKEA and JYSK, had problems after entry that were mostly connected with the global product portfolio, and price range, which could not be applied to the Chinese market. These two used their financial strength, and Scandinavian origin to rebrand in China, change both the prices and products, as well as store strategy to turn weaknesses into strength and overcome the threats of low loyalty, and high cultural difference.
On the other side, BoConcept, from the higher-end of the market, did not experience problems with these factors. The major problem was the copying of the brand concept, and products by the local competitors, as a result of low level of trademark and copyright protection in China. The long fight over this resulted in beating most of the “copycats”. BoConcept used its financials to start acquiring the franchise stores, in order to avoid strategic misalignment. We can see t even though, BoConcept has different problems than IKEA and JYSK, the company also used its strengths to turn around the weaknesses and overcome market threats, to maintain a better position in China.
Looking back to our literature review, we can see that it is true that the ability of companies to adapt to local market needs is very important in order to maintain the market position for the brand that have a very wide and low-cost strategy. However, for brands like BoConcept, which did not experience problems with the adaptability, string protection of brand equity is more crucial.
259 Self-made based on sections 3.3 and 4.3
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Alexandra Nagyova, student number: 59075 Andreea Andrei, student number: 59086 Dong Han, student number: 59087
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