THE EXPANSION OF IKEA TOWARDS NEW EMERGING MARKETS - THE ECUADORIAN CASE
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Author: Juan Pablo Sánchez Ubidia.
Academic Supervisor: Robson Silva Rocha
MSc. Finance & International Business
THE EXPANSION OF IKEA TOWARDS NEW
EMERGING MARKETS – THE ECUADORIAN CASE
Aarhus University, Business & Social Sciences
Department of Economics and Business Administration
September 2013
Acknowledgements
The present thesis has been possible thanks to the guidance and constant
motivation of persons who directly or indirectly have contributed with their expertise
and affection during the whole process.
I would like to thank first and foremost to my academic supervisor, Robson
Silva Rocha, for his guidance, patience and expertise given to me during the writing
process, which have helped me to address the topic from a different and broader
perspective.
Next, I would like to thank to my wife Anne, my family and friends in Ecuador
for the support and motivation given to me within these two years of study.
Last but not least, I would like to thank Aarhus University, Business and Social
Sciences, for two enriching learning years and for the level of knowledge achieved with
my Master Program.
Finally, this achievement is dedicated to my son Tobias, who has been the
principal motivation and source of happiness in difficult times.
“Never consider study as a duty, but as an opportunity to penetrate into the beautiful
and wonderful world of knowledge.”
Albert Einstein.
2
Table of Contents
1. INTRODUCTION ...................................................................................................... 4
1.1 PROBLEM STATEMENT ..................................................................................... 5
1.2 METHODOLOGY ................................................................................................. 6
1.2.1 DATA SOURCE AND CRITIQUE................................................................... 9
1.3 LIMITATIONS..................................................................................................... 10
2. LITERATURE REVIEW ........................................................................................ 10
2.1 CONSUMER BEHAVIOR AND ITS DRIVERS................................................. 10
2.2 FRAMEWORK SELECTION .............................................................................. 16
2.3 MANRAI & MANRAI’S CONCEPTUAL MODEL............................................ 18
3. ECUADOR – ECONOMY, SOCIETY AND CONSUMPTION PATTERNS. .. 20
3.1 ECONOMY .......................................................................................................... 20
3.2 SOCIETY.............................................................................................................. 21
3.3 INCOME AND EXPENDITURE ......................................................................... 24
3.3.1 INCOME – GROWTH AND DISTRIBUTION............................................... 25
3.3.2 EXPENDITURE............................................................................................. 26
4. DRIVERS OF CHANGE - GLOBALIZATION ................................................... 29
4.1 MIGRATION........................................................................................................ 30
4.2 MODERNIZATION ............................................................................................. 34
4.3 INTERNATIONAL TRADE ................................................................................ 36
5. CONSEQUENCES OF THE ECUADORIAN CHANGE .................................... 38
5.1 ECUADORIAN PERCEPTION OF FOREIGN BRANDS .................................. 40
6. ECUADORIAN LIFE STYLES AND CONSUMER BEHAVIOR ..................... 42
6.1 CONSUMERS’ LIFESTYLES ............................................................................. 43
6.2 THE ROLL OF HOUSEHOLD GOODS.............................................................. 45
6.3 DO IT YOURSELF (DIY) CONCEPT IN ECUADOR ........................................ 47
6.4 COSUMER PROFILE .......................................................................................... 48
7. RETAIL INDUSTRY ............................................................................................... 50
7.1 STANDARDIZATION IN RETAIL INDUSTRY................................................ 51
7.2 RETAILERS IN ECUADOR................................................................................ 52
8. IKEA – COMPANY PROFILE .............................................................................. 55
8.1 HISTORY, GROWTH AND EXPANSION ......................................................... 55
8.2 THE IKEA BUSINESS IDEA .............................................................................. 56
8.3 MARKETING STRATEGY ................................................................................. 57
9. CONCLUSIONS AND HYPOTHESES ................................................................. 58
10. FUTURE RESEARCH AND PRACTICAL APPLICATIONS ......................... 62
11. REFERENCES ....................................................................................................... 63
12. APPENDIXES......................................................................................................... 73
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1. INTRODUCTION The globalization process witnessed during the late 1980’s has led markets and industries to develop new strategies due to the intense international competition. The retail sector is not the exception and has developed in the same manner, forcing players within this industry to be aware and react proactively. According to Akehurts & Alexander (2005), the study of retailing is fundamentally international by nature, due to the recent development of its operations. The internationalization process within retailing and other industries might respond to different aims, such as: operational costs, geographical dispersion, market share or strategically (Akehurts & Alexander, 2005), therefore during the decade of 1990’s retailers that were already operating abroad, began to look at new alternative emerging markets as business opportunity; being China and Eastern Europe the most popular at that time. In the case of IKEA, it used to operate in Western Europe, but it was not until 1990 where the first IKEA store was open in Poland and Hungary; a year later in Arabic Saudi and Czech Republic and by 1998, China was part of its portfolio (IKEA, 2013a). The international nature of retailers, arise many questions about the business strategy that they pursue abroad. Since markets are different and many external factors to the company play an important role, the relevance of two opposed forces become essentially vital in order to succeed in unknown markets, namely standardization and adaptation strategies. These streams have captured the attention of researches and have led companies to rely their strategies on the differences inherent to each market (adaptation) but presenting similar products, layouts or even prices within each market they operate or plan to expand. Burt et.al. (2011) in his comparative study about standardized marketing strategies in retailing, IKEA is compared in three different markets (UK, Sweden and China), the results imply a standardized approach worldwide with some minimal degree of adaptation depending on the local cultural values. Thus, following the IKEA’s way to do business abroad, it seems that a standardized approach works for the giant retailer, despite the notable cultural differences. So, is it going to work in Ecuador too? The good socio-economic moment that Latin America is currently experiencing (World Bank, 2013a), represent for many multinationals a good business opportunity and an interesting destination to invest and expand. According to the World Bank (2013a), Latin America & Caribbean region has a GDP growth rate of 4,7% by the end of 2011 4
(the fastest growing region in the world), which is far above the growth rate of more developed areas, such as the European Union, which reported a GDP growth rate of 1,5% in the same year (World Bank, 2013b). This and some other factors, makes Latin America a strategic location to operate. The scope of this research comprises Ecuador specifically, since it was the second faster growing economy of the region with a GDP growth rate of 8% by 2011 and 5% by the end of 2012 (World Bank, 2013c). This has led to an increase of the middle class who is willing to spend money on non-basic products; being home furnishing one of them. This paper conducts a theoretical research taking into consideration the well-known multinational IKEA going to a complete unexplored market, Ecuador. The research aims to formulate some hypotheses about whether or not the standardized IKEA concept (i.e. self-transportation and self-assembling of furniture) fits the Ecuadorian consumer behavior. As the brand and concept are new in Ecuador, the IKEA’s way to purchase household furniture represents an innovation and as such, there is a risk involved, which is related to the consumer’s predisposition and acceptance of the items and the brand itself. The resulting hypotheses range form, an eventual acceptance to total failure of the IKEA concept in Ecuador, due to principally cultural factors, as well as, the impact of globalization. 1.1 PROBLEM STATEMENT As mentioned above, internationalization of retailers has become gradually the cornerstone of their business. However, the search of an optimal market that grants positive conditions is not an easy task. By finding a potential market, the success is not guaranteed and further efforts must be done. IKEA is often used as an example of standardized and centralized company, as well as “global” retailer, which applies the same approach in every market it operates (Burt et. al., 2011), the author also suggests that the standardization of international retailers should consist on the replication of the concept itself instead of activities. Therefore it is in the interest of the paper to formulate substantiated hypotheses regarding this approach. Besides, the amount of literature regarding standardization and adaptation strategies is vast and well supported, but it has been done from the producer/exporter perspective (Jain, 1989; Walters, 1986; Cavusgil, 1993; Maktoba & Porter, 2011), whence this research pretends to address standardization from the consumers’ 5
perspective and how it impacts their behavior. Further, the country selected for the
study represents a completely different market than IKEA is used to operate, meaning
different socio-economical settings. Moreover, consumers’ tastes and preferences
within household items – furniture specially- tend to change constantly because of
modernization and globalization effects; such changes have led to new consumption
patterns which result in the demand of global products/brands, creating the global
consumer (GC) (Manrai & Manrai, 2011). Since household goods represents an
important part of humans’ lives, its demand is especially sensible to changes on the
consumer behavior; retailers should be aware about this, as such changes are culturally
driven (Evans et.al. 2000; Hardesty & Bearden, 2009). Thus, taking into consideration
IKEA with its standardized approach of its concept, the main research question is as
follow:
How the IKEA concept would be translated in Ecuador?
In order to answer this primary question more sub-questions must be analyzed and
answered too:
• How does the Ecuadorian culture influence the consumer behavior?
• How does globalization influence the consumer behavior in Ecuador?
• How does the socio-economic transition of Ecuador impact the consumer
behavior?
• How is the Ecuadorian consumer lifestyle?
• What is the roll of household goods among Ecuadorians?
• Is there a Do It Yourself (DIY) culture in Ecuador?
• How does the retail sector looks like in Ecuador?
• How does IKEA present their brand/concept abroad?
The field of consumer behavior is strongly linked to culture and cultural values,
therefore the approach of the present research address the effect of culture on consumer
behavior and how globalization has influenced such behavior. Thus, the thesis attempts
to formulate hypotheses based on the Ecuadorian consumer behavior from a socio-
economic perspective, and on the other hand addressing the standardized strategy used
by IKEA.
1.2 METHODOLOGY
The present research is not based on an existing IKEA store in Ecuador, therefore it is
impossible to conduct an empirical investigation and test the results. Hence, the nature
6
of the research is purely theoretical from the consumer perspective, and as such, it relies
on previous research papers and the relevant literature available, meaning that the main
methodology of the research is a literature review.
As literature review, is the base of the thesis, it is worth to highlight that the research
does not pretend to analyze and prove the business opportunity, the possible demand or
how IKEA should enter the Ecuadorian market. Instead, the research pretends, on the
one hand, to clarify what are the drivers that have contributed to the socio-economic
upturn of Ecuador through the last years and how this transition together with culture,
influence the local consumer behavior - in general as well as within the retail sector. On
the other hand, the research pretends to analyze to what extent Ecuadorians are willing
to purchase new foreign IKEA products under the standardized concept although it is
new, different and innovative among Ecuadorians. Thus, at the end of the research the
final hypotheses will be formulated, in order to set up the guidelines for further
research. The figure bellow, presents the structure used in order to achieve the thesis’
objective:
Figure 1: Structure of the research.
Literature Review (theoretical
framework and model Selection)
Globalization, Ecuador's culture, and
its effects on consumer behavior
The retail sector in Ecuador
IKEA overview
Conclusions and formulation of
hypotheses
Source: Own contribution.
The first part aims to present concepts and theories relevant to the topic that are
mentioned throughout the thesis and how different scholars handle with them. Under
the literature review chapter, definitions of culture, consumer behavior and
globalization are presented. Later, the selection of the research’s theoretical framework
is introduced and justified; to do so, the work of Venkatesh (1995) tiled:
7
“Ethnoconsumerism” and Manrai & Manrai (2011) titled: “Cross-Cultural and Cross- National Consumer Research in the Global Economy of the Twenty-First Century” are used, as they are aligned to the research question, since they include both, culture and globalization as the main drivers of consumer behavior. The second part attempts to apply the concepts and theories previously mentioned in an Ecuadorian context, in order to comprehend the transformation of the market being the matter of study and the effects on consumer behavior. Furthermore, a presentation of the current Ecuadorian socio-economic situation and its changes will be presented by using the PEST (Political, Economic, Social and Technological) framework, emphasizing the economic and social factors. Ecuador is analyzed in order to gain a better knowledge about the potential host market, the local consumer behavior and the role of home furniture. Thirdly, since IKEA is considered a global retailer (Burt et. al., 2011), this part presents an overview of the retail sector in Ecuador and how consumers behave within it. The outcome of this part allows the research to identify how retailers currently are operating in Ecuador and to what extend their “way to sell” differ from the IKEA way. According to Martenson (1987), the field of retailing is strongly linked to cultural values; therefore it is worth to address the research from a social perspective, as some changes in the local values due to globalization, might represent changes in the way consumers choose products/brands or services. Here, the main source of information includes newspapers, reports and local business magazines. The fourth part deals with IKEA and introduce its practices worldwide in order to get a more comprehensive idea of the international activities performed by the multinational; here the data is collected from reports, IKEA’s website and studies done from scholars who include the company in their research. Then, the standardized approach of the company is analyzed. This is useful for the research, as it gives the whole panorama of the IKEA way, meaning what and how it commercializes its products and brand. Finally, given the characteristics of the Ecuadorian consumer behavior and how they actually make decisions (general and within retail), and knowing on the other hand, the IKEA’s concept and how it operates in markets overseas, the last part discuss the results that allow the formulation of the final hypotheses. Recommendations for future research are also presented in this section. Thus, making reference to the problem statement mentioned in the previous section, the methodology selected for the thesis allows answering the main research question, by 8
looking at the culture and the effect of globalization (modernization, migration and international trade) on the Ecuadorian consumer behavior. This is to analyze whether or not these new ways of consumption fits the IKEA concept; all of this done from the consumer’s perspective and not from the IKEA’s one. 1.2.1 DATA SOURCE AND CRITIQUE Regarding the data its sources and inherent validation, doubt of their reliability is present. The thesis deals with six principal groups of information: annual reports, independent reports, statistics, journals, articles, business magazines and newspapers from data bases available at Aarhus University libraries and in the Ecuadorian media. As a theoretical work, articles, journals and qualitative data are the main source of information, the reliability of them become crucial; therefore the most used database is Business Source Complete, MarketLine, Passport and Euromonitor International, which are a reliable academic sources containing journals, articles, country and company reports and newspapers. Furthermore, due to the lack of information about Ecuador and its consumer behavior within international databases, local business magazines, newspapers and reports are consulted. It is important to mention that such reports are not of academic nature, and represents the author’s interpretation of collected data from national and international institutions. When it is about quantitative data and statistics about Ecuador, both national and international databases are consulted in order to minimize any bias from national institutions such as The Ecuadorian Central Bank (BCE), The National Institution of Statistics and Censuses (INEC); and compare them to what is published by international institutions such as the World Bank, The CIA’s World Factbook (CIA), MarketLine and Euromonitor International. The annual reports published by IKEA and its website are used in this research to illustrate the situation of the company within the industry and its current situation. Since, these reports are considered as the presentation to stakeholders, positives aspects of the company might be highlighted while other less favorable might be hidden or slighted within the frames of the law. However, annual reports are being used in this thesis to gain an insight and knowledge about IKEA. 9
1.3 LIMITATIONS The scope of this research address two drivers of consumer behavior, namely culture and globalization, but some other factors that are not in the scope of the thesis could influence such a behavior, since it is difficult, if not impossible, to address in one research. Furthermore, for the purpose of the thesis, globalization is composed of modernization, migration and international trade, which limit the general idea of it. Since the research analyzes IKEA as a retailer and its concept, further services such as restaurants, picking and delivery, home delivery, assembly and installation, kitchen planning, office planning, home furnishing advisement and play grounds for kids are considered beyond of the scope of the thesis and consequently not included in it. Additionally, Ecuador is composed by four regions (i.e. Amazon, Andean, Coast and Galapagos islands), which mean different socio-economic groups, cultures, traditions, behaviors, etc., therefore the research attempts to target the middle and high class who use retail outlets on a regular basis. Finally, the PEST framework used to analyze the country, as mentioned above, highlights the economical and social aspects, so excluding the political and technological factors from the research’s scope. 2. LITERATURE REVIEW This section introduces definitions of consumer behavior and its drivers, namely culture and globalization. Subsequently, the theoretical framework and a model, which serve as a base to build the investigation are presented and justified. 2.1 CONSUMER BEHAVIOR AND ITS DRIVERS The consumer behavior’s field has been addressed for many scholars (Hardesty & Bearden, 2009; Manrai & Manrai, 2010, Manrai & Manrai, 2011; Hoyer & McInnis, 2007; Luna & Gupta, 2001; Loudon & Della, 1993; Venkatesh, 1995) from a long period of time. According to Richarme (2007) the study of consumer decision-making began around three centuries ago. However, these early researches were done from an economic perspective, meaning that only the act of purchase was included (Loudon & Della, 1993). It is supported in the book of Schiffman and Kanuk (2007) titled “Consumer Behavior”, where consumers are defined as rational decision makers driven by self-interest. As a result of this early perspective, the model of “Utility Theory” came up, which implies that persons make choices based on the results they obtain from such decisions. 10
These definitions have been evolved throughout centuries, but it is only since the fifties scholars began to introduce further activities such as: need recognition, information search, evaluation of alternatives, purchase intentions, the act of purchase, consumption and disposal; into their definitions of consumer behavior (Blackwell et. al., 2001). Since then, academics have agreed that consumer behavior is a dynamic process that involves more than buying a product or using a service (Hoyer & McInnis, 2007). Accordingly, contemporary definitions include further activities, as the one given by Hoyer and McInnis (2007, pp.3) in their book “Consumer Behavior”, they define it as: “the totality of consumers’ decisions with respect to the acquisition, consumption, and disposition of goods, services, time, and ideas by human decision making units.” Solomon et.al. (2006, pp. 6) define consumer behavior as “the study of the processes involved when individuals or groups select, purchase, use or dispose of products, services, ideas or experiences to satisfy needs and desires.” Aligned to this definition Schiffman & Kanuk (2007, p.3) claims “the behavior that consumers display in searching for, purchasing, using, evaluating and disposing of products and services that they expect will satisfy their needs.” More contemporary definitions are similar in scope. The definitions mentioned above use the words: individuals, human, groups. Thus, as stated before, when studying consumer behavior of certain groups, it is implicitly addressed culture as the cornerstone of the topic. Culture. There are plenty of definitions about culture and what it involves. A particular general definition given by one of the culture researches is: “A culture is the configuration of learned behavior and results of learned behavior whose component elements are shared and transmitted by the members of a particular society” (Linton, 1945). However, scholars have developed two approaches to definite culture and its linkage with consumer behavior from different perspectives, seen as two sides of the same coin (Luna & Gupta, 2001), namely the etic and emic approaches. Furthermore, Venkatesh (1995) introduces a third new paradigm to study culture and how it is linked to consumer behavior, adding the term ethnoconsumerism to the study of consumer behavior. The etic approach has been widely used in cross-cultural research, as it attempts to compare two or more cultures. Researches who work under this approach use the Hofstede’s definition that define culture as “the collective programming of the mind which distinguishes the members or one group or category from another” (Hofstede, 11
1997, pp. 5). The emic perspective, on the other hand attempts to gain a better understanding from the viewpoint of the subject studied (Luna & Gupta, 2001), which means that an emic approach does not pretend to compare directly two cultures; instead it tries to provide detailed information of a certain culture. An emic definition of culture is: “the lens through which all phenomena are seen. It determines how these phenomena are apprehended and assimilated. Second, culture is the blueprint of human activity. It determines the coordinates of social action and productive activity, specifying the behaviors and objects that issue from both” (McCracken, 1988, p. 73). The ethnoconsumerism framework, in turn studies consumption from the point of view of the social/cultural group that is the subject of study, meaning that it examines behavior on the basis of the cultural facts of that group (Venkatesh, 1995). The definition of culture under this conceptual framework is: “culture is what defines a human community, its individuals and social organizations, along with other economic and political systems” (Venkatesh, 1995, pp. 5). The author also advocates for the dynamism of culture, due to historical and global circumstances. Thus, by having clear what culture is about and what is involved in it under the three main perspectives of consumer behavior’s studies; the next step is to determine the interaction of culture with consumer behavior. Venkatesh (1995) states that consumer behavior is a cultural phenomenon, meaning that when describing consumer behavior, researches use - implicitly or explicitly - cultural groups as the level of analysis. Aligned to this view, Luna & Gupta (2001), state that the consumer behavior of an individual is determined by its cultural value systems (e.g. symbols, values, heroes, rituals), which is developed over time, as individuals socialize into a certain group. Consequently, members of a cultural group may observe an individual’s consumption behaviors, leaving room for imitation or rejection of certain patterns of consumption. Thus, culture affects consumer behavior, which itself may reinforce manifestations of culture (Peter & Olson, 1998); this is a bidirectional relationship. Furthermore, Manrai & Manrai (2011) affirm that cultural factors affect consumer behavior directly as well as through the social, personal and psychological components/consequences of culture (See figure 4). Apart from the relationship between culture and consumer behavior, is important to highlight the roll of marketing - advertising specifically – in the sense of how it affects culture’s manifestations and subsequently, consumer behavior. Thus, marketing communications can affect consumer behavior - independent of culture – an act as 12
moderator of the effect of culture on consumer behavior (Luna & Gupta, 2001), that is,
marketing’s main objective is to create a need or the sense of dissatisfaction in order to
keep consumers purchasing goods and services on a regular basis. McCracken (1986;
1988) address the effect of marketing activities on consumer behavior, and state that
these activities serve as a vehicle to transfer values from the culturally constituted
world, to consumer goods. The figure below summarizes these linkages.
Figure 2. A Model of the interaction of culture and consumer behavior.
Cultural Values System
(symbols, heroes, rituals)
)
Marketing
Communications
(Advertising)
Consumer Behavior
Source: Luna & Gupta (2001, pp. 47)
Globalization. This word has become one of the most important in the vocabulary of
scholars, practitioners and policy makers throughout the decades, being the center of
debates and considered the most important phenomena of today’s markets (Manrai &
Manrai, 2011); to the extent of considering it like a natural law (Kerkhoff, 2006).
Additionally, globalization has been studied from different perspectives, such as:
cultural, economic, political, social, etc. and how it impacts each of them (Manrai &
Manrai, 2011).
Consequently, globalization is seen as a complex process with benefits and pitfalls
depending on the perspective, but despite the complexity of the phenomena, most of the
definitions are similar in scope. Thus, Manrai & Manrai (2010) define globalization as
the worldwide accessibility and cross-border flow of goods, services, money, people
and technology that is facilitated by developments in transportation,
telecommunications and information technology. In almost the same manner Held
(1999) defines globalization as the process fueled by, and resulting in, increasing cross-
border flows of goods, services, money, people and culture.
Although, globalization is a worldwide phenomenon, its impact across countries may
13
differ, meaning that a better adaptation or rejection of globalization is possible (Wiarda, 2007); the author also discusses the positive and negative aspects of globalization. Pick & Dayaram (2006) address the negative effects of globalization and state that it brings notable advantages for the privileged classes, while it reinforces the vulnerability of the lower classes. Supporting this point of view (Ger, 1996) advocate that globalization has contributed to social inequality and class polarization due to differences in global consumption patterns, which in turn is translated into personal problems (i.e. frustrations, materialism, stress, etc.) and global problems (i.e. health and environmental related). Generally, opponents to globalization argue that it involves a threat to cultural autonomy due to the fixation of human choices and values. Thus, due to this lack of consensus about the benefits/pitfalls of globalization, the literature on globalization and consumer behavior is limited (Manrai & Manrai, 2011). However, researches acknowledge the critical importance of the understanding of globalization for international marketers (Belk, 1996; Cleveland & Laroche, 2006; Cornwell & Drennan, 2004; Ger, 1999; Levitt, 1983) since it might bring advantages in tow ways. Firstly, international marketers need to understand how globalization affects cross-cultural and/or cross-national consumer behavior, which is the case of the present research. Secondly, by understanding globalization, international marketers are able to design effective comparative marketing strategies, which take into account differences and similarities in cross-cultural consumer behavior as well as changes in the marketing environment caused by globalization (Manrai & Manrai, 2011). Regardless the perspective of globalization, the fact is that now anyone is able to drive the same cars, listen the same music, wear similar fashion trends, etc., regardless the geographical location; which is translated into homogenization among consumers patterns of consumption in a global basis (Belk, 1995). Thus, the homogeneity in the consumer’s minds is seen as a consequence of the globalization of markets, helped by technological drivers (Levitt, 1983) for which products/brands take advantages. So, by having homogenous products/brands all over the world, one might ask: are there also homogenous consumers worldwide? How globalization impacts consumer behavior? These questions may be answered by revising the work of Manrai & Manrai (2011) where they develop a conceptual model about the effect of culture on consumer behavior incorporating the influence of globalization. In this work, the authors, based on their previous research (Manrai & Manrai, 2010) indentify five different categories of 14
consumer cultural orientations resulting from globalization, namely the global consumer
culture (GCC), regional consumer culture (RCC), national consumer culture (NCC),
ethnic consumer culture (ECC) and individual consumer culture (ICC). All these
categories are not exclusives, meaning that they can coexist, and the impact on
consumer behavior varies by world/country region, products, and population’s segment
and consumption situation. The figure bellow presents the categories and linkages with
consumer behavior.
Figure 3. Effects of Globalization on Consumer’s Cultural Orientation.
Source: Manrai & Manrai 2011, pp. 170.
The homogenization of markets is seen as a consequence of globalization and has led to
the reconsideration of the idea of using countries as the cultural unit of analysis for
segmentation (Cleveland & Laroche, 2006), which means that similar consumer
behavior might be observed across certain global segments. This is the global consumer
culture (GCC), which is defined as “cultural entity not associated with a single country,
but rather a larger group generally recognized as international and transcending
individual national culture.” (Alden et.al., 1999, pp. 80). Jain (1989) observed this
trend and concludes that demographic groups within an urban area of a developing
country have the same consumer behavior as their counterpart in developed countries.
Thus, one may conclude that a global consumer actually exists due to globalization.
The regional consumer culture (RCC) is seen as another homogenizing effect of
globalization, within certain global regions (e.g. NAFTA, EU), where consumption
patterns and marketing practices applied by companies within these regions are similar
15
due to the free flow of goods, services, money and people (Manrai & Manrai, 2011). This free flow has led to changes in consumer behavior; an example of this, is the many consumers within the European Union (EU) that travel to neighboring countries to buy products, which are more expensive in their home country. However, globalization has also triggered heterogenization as an opposite effect of homogenization (Manrai & Manrai, 2011), meaning that some initiatives may be undertaken by individuals of a society in order to restore their sense of identity and control, which may be considered loss due to the homogenizing effects of globalization (Cornwell & Drennan, 2004). Thus, consumers are fragmented, and this fragmentation can some times result in nationalism or regionalism and heterogeneity (Clark, 1997). These behaviors lead to new ways of consumption relied on the reinforcement/strengthening of national culture. Consumers “biased” by these values are considered to be part of the national consumer culture (NCC) and ethnic consumer culture (ECC). Additionally, the free flow of people on a worldwide basis has also impacted national cultures, and as a consequence most of the countries today are considered multiethnic and multicultural societies (Manrai & Manrai, 2011). This phenomenon is observable through the differences between consumers and their cultural orientations within a country; such differences are approached by the individual consumer culture (ICC). This is also the case of the present research as Ecuador is a multicultural and multiethnic society with a high degree of diversity, meaning that for example people from the cost region have different tastes than people from the Andean region. This supports the affirmation given by Furrer et.al. (2000) who state that countries and cultures are not synonymous. Summarizing, culture and globalization has direct impact on consumer behavior, and at the same time globalization may affect culture, which affects consumer behavior too. Thus, it is an interconnected relationship that is sensible to changes, meaning that changes in the cultures brought by the globalization, are translated into changes of local values, which in turn affect consumer behavior. The next section presents and justifies the framework selected for the purposes of the thesis and a conceptual model to study consumer behavior is introduced. 2.2 FRAMEWORK SELECTION The previous section mentioned the three frameworks available for the study of 16
consumer behavior from the cultural point of view (etic, emic and ethnoconsumerism). The etic approach in cross-cultural research is merely comparative, based on the work of Hofstede (1980, 1997) who attempt to identify fundamental differences between national cultures and how countries perceive their world based on four cultural dimensions: power distance, individualism, masculinity, uncertainty avoidance and long-term orientation. Hence, the etic approach is not considered the most appropriate for the research aims, since the thesis does not pretend to compare the Ecuadorian culture with another country/culture. Besides, it has not direct implications on consumer behavior, meaning that it will not give a profile of the Ecuadorian consumer. This approach may be useful if IKEA wanted to analyze the Ecuadorian culture in order to develop a corporate culture in an eventual case of expansion or to develop an appropriate marketing strategy, but it is not the case. On the other hand, even though the emic approach does not attempt to compare differences between cultures; it provides with a deeper cultural understanding from the point of view of the subject studied – consumer behavior in this case. This approach has direct implications on consumer behavior, since it will provide with sufficient and reliable information about Ecuadorian consumers and their consumption patterns. Nevertheless, this approach has been criticized by Venkatesh, (1995), who state that an emic approach is limited to just strategies of data collection, and that does not leave room for discussion and interpretation of deeper issues; therefore the emic approach has been excluded from the research. The same author (i.e. Venkatesh, 1995) introduces the third framework in 1995 called ethnoconsumerism, which studies consumption from the point of view of the social/cultural group that is the subject of study- Ecuadorians - and advocates for the uniqueness of each culture. Additionally, this framework assumes that consumer behavior is a cultural phenomenon, meaning that implicitly or explicitly, cultural groups are the level of analysis and that it has direct implications on consumer behavior. Hence, this framework is the most suitable for the research purposes, as it incorporates the social group and implicitly addresses consumer behavior as a culturally constituted behavior. Besides, ethnoconsumerism allows the researcher gaining a wider overview of the consumption patterns, as well as the causes and consequences of changes in consumer behavior. Finally, the framework selected comprises three layers of studies, namely the 17
cultural (symbols and beliefs, systems, norms and rituals) social (social organization, institutions, etc.) and individual (personality, cognition, behavior, ideas, etc.) (Venkatesh, 1995). 2.3 MANRAI & MANRAI’S CONCEPTUAL MODEL The article of Manrai & Manrai (2011) titled “Cross-Cultural and Cross-National Consumer Research in the Global Economy of the Twenty-First Century” presents a conceptual model about the impact of culture on consumer behavior, but adding the effects of globalization. The model shows that consumer behavior is affected by culture and through its components/consequences (i.e. social, personal and psychological); where intermediary variables and processes related to these three components/consequences are included. Furthermore, the model also addresses the influences of other environmental factors (i.e. economic, political, competitive and technological) and marketing strategies (i.e. product, price, place and promotion) on consumer behavior. Additionally, the conceptual model includes the five categories of consumer culture orientation resulting from globalization (i.e. GCC, RCC, NCC, ECC and ICC) discussed in section 2.1 when defining globalization. Hence, the selected conceptual model allows the analysis of consumer behavior of a given social group from a broader perspective. Aligned to the research, it means that the Ecuadorian consumer behavior is addressed from a cultural point of view and from a socio-economic perspective, meaning that factors such as: migration, purchase power of households, modernization, etc. are part of the analysis. On the other hand, since this model takes into consideration how marketing strategies influence consumer behavior; the implications of the standardized strategy of IKEA regarding its marketing mix can be analyzed in an Ecuadorian context. The model adds value to the research since; it is seen as a complementation of the theoretical framework selected (i.e. ethnoconsumerism) because apart of studying consumption from a cultural perspective, the roll of external factors, marketing strategy of the company and globalization are included. The model is presented as follows: 18
Figure 4. Effect of culture on consumer behavior: A conceptual model incorporating the influence of Globalization. Source: Manrai & Manrai (2011), pp. 169. The top of the model identifies cultural influences/variables, which are different conceptualizations of culture, and include: the cultural value dimensions (Hofstede, 1980, 2001), Silent languages of culture (Hall, 1959, 1060), Cultural Categories (Triandis & Gelfand, 1998), and sub-cultural groups (Kotler & Keller, 2009). Next, several intermediary variables and processes for each cultural component/consequence are presented based on recent literature that links globalization and marketing. This enriches the research, as it includes - explicitly or implicitly- important topics in the field of international business. Summarizing, this section has dealt with the concepts, definitions and theories that serve as the base of the research, making emphasis upon the influence of culture and globalization on consumer behavior. Besides, the theoretical framework and the model presented act as complementary foundations, as they attempt to address most possible issues included in the scope of the thesis. In the coming section a presentation of Ecuador, its drivers of change and its consumer behavior is presented, linking thus, the theory discussed here with the final aim of the research, which is to formulate hypotheses about of how the IKEA concept would be translated in Ecuador. 19
3. ECUADOR – ECONOMY, SOCIETY AND CONSUMPTION PATTERNS. This chapter is aimed to present the country, emphasizing its economical and social changes through the last years following the guidelines provided by the PEST framework. Once these changes are covered, the implications of them on consumption patterns are identified through and analysis of Ecuadorian’s households income and expenditure. 3.1 ECONOMY Ecuador suffered a financial crisis back in 1999, which contracted the GDP by 5.8% increasing thus, poverty and deepening income disparity. Further, due to the uncontrollable inflation (52%) and currency’s devaluation (25,000 Sucre/USD) the government had to adopt the US dollar as the national currency in order to avoid the collapse of the financial systems and to maintain confidence among international creditors (MarketLine, 2013). Later on, in the post-crisis period from 2001-2008 the economy began it recovery, growing thus, at an average of 5.1% until 2009 where, due to the global financial crisis and low oil prices, the GDP growth rate dropped to 0.4% (MarketLine, 2013). However, since 2010 the economy has been growing at favorable rates, positioning Ecuador as the third faster growing economy in Latin America with a GDP growth rate of 8% by 2011 and 5% by the end of 2012 (World Bank, 2013c; MarketLine, 2013; Euromonitor International, 2013a). Appendix 1 shows the evolution of the GDP 2001-2012. Ecuador’s economy is dependent in a great extend of its natural resources – crude oil mainly, which accounted for more than half on the country’s exports earnings during the last years (CIA, 2013). Crude oil contributes to 14-20% of country’s GDP and 20- 30% of the government revenue by 2011(MarketLine, 2013). Further sectors, such as agriculture, services and industry drive the economy too (See appendix 2). Despite, the fact that Ecuador is one of the smallest countries in Latin America, it is the biggest exporter of banana in the world and an important supplier of crude oil and derivatives and cut flowers, just to mention the most relevant. This international trade is translated into improved commercial relationships, being thus USA, EU, Canada, Mexico, China, Spain and others Latin American countries the principal commercial partners (Euromonitor International, 2013a). Thus, regarding global integration and trade, Ecuador has reached important positions, such as the membership of the World Trade Organization (WTO) back in 1996 when it 20
was required to reduce import tariff rates to 30% or less. According to the WTO, Ecuador imposes currently a mean tariff rate on importations from most favored nations of 9.3% in 2011, which represent a decrease compare to the 11.4% in 2005 (Euromonitor International, 2013a). These means are reflected in the growth of imports into the country that amounted around $23.54bn in 2010 and $27.37bn in 2011 (BCE, 2013a). Additionally, according to Ecuadorian Central Bank (BCE, 2013a), Foreign Direct Investments (FDI) within commerce, industrial manufacturing and mining have accounted for 71% of the total in 2011 reaching $640 million. As a result, many new brands, services, products, retailers have entered the Ecuadorian market throughout the last decade. This in turn means that consumers are aware and up-to-date regarding new global products/services, trends and events, which may change the perception of foreign products/brands. However, the willingness of the Ecuadorian government to receive FDI is constrained by some protectionism barriers they impose to foreign investors. An example of this is that within oil industry, the state owned companies control the market leaving a small part to international firms and new entrants have to fulfill certain conditions in order the get the permission of oil exploitation (Euromonitor International, 2013a). Finally, a relative stable political environment has accompanied the improvement of the principal economic indicators throughout the last decade, as the President of Ecuador Rafael Correa has been leading since 2007 and was recently re-elected for the period 2013-2017 (Euromonitor International, 2013a). 3.2 SOCIETY As a consequence of the economic evolution mentioned above, the local society has been changing accordingly. Now where Ecuadorians have more money certain behavioral changes are observable, which are related directly to the field of consumer behavior. Demographically, the population of Ecuador (15.4 million) is considered young with an average of 26 years old, and the majority of the population (63.9%) is in the 15-64 years age band (CIA, 2013), where the economically wealthiest Ecuadorians rank between 35-39 years with an average gross income of USD 6.717 in 2011 (Euromonitor International, 2013b). However, the middle class dominates the population and comprises 1.1 million of households, equivalent to the 27.5% of the total households or 21
34% of the population in Ecuador by the end of 2011 (Euromonitor International, 2013b). The improvement of the economy, has also led to the rise of the middle class, averaging an increase of 17.4% between 2006 and 2011. The lower classes live usually in rural areas, and are attempting to migrate to the big cities (Quito and Guayaquil specially), reflecting the 67% of urban population (CIA, 2013). This streams of people to the urban areas has helped to struggle unemployment, which according to (BCE, 2013b) is 4.64%, till may 2013; this rate has been stable after the global financial crisis, due to the public sector spending on employment generation schemes and the reinforcement of industry (MarketLine, 2013). This means that more people from rural areas prefer to work within industry (e.g. manufacturing) than in the field of agriculture. See appendix 2. Besides, urban areas enjoy the benefits of the modernization and economic upturn, meaning different levels of income, compare to the rural ones (Musgrove, 1979), due to the resources allocated to these areas, and usually, international investors decide to operate in the major cities of the country, becoming them more cosmopolitan, modern and similar to the major cities in developed countries. This, support the affirmation of Jain (1989) who concludes that demographic groups within an urban area of a developing country have the same consumer behavior as their counterpart in developed countries. Other factor that plays a critical roll regarding income differences is the level of education (Musgrove, 1979), since there is a strong linkage between educational level and social status. According to (CIA, 2013) Ecuador’s population is well educated, with a 91% rate of literacy due to the recent social policies taken by the government supported by constitutional mandates, that claim education is free the first ten years and compulsory. Regarding secondary and tertiary education, gross enrollment ratio during the period 2001-2010 was 75.4 % and 42.2% respectively (CIA, 2013), which means more skilled labor force in the future. Furthermore, there is a program of international scholarships, where the government cover all the expenses of students that take educations of third or four level abroad at the top universities in the world, with the condition that the professionals have to return to the country and work for at least twice the number of years they used in their educations. It is important to highlight that only specific fields, which are of national interest apply for this program (i.e. health, natural resources, productivity and innovation, social, art and culture sciences) (SENESCYT, 2013). This program was launched in response of the brains drain caused by the emigration of educated Ecuadorians during the last financial crisis in 1999, which 22
resulted in a severe shortage of skilled labor in many regions of the country (MarketLine, 2013) and to improve the quality of professionals that will bring new ideas and solutions for national problems. Furthermore, the local financial and political crisis in 1999 forced the emigration of people, principally to USA, Italy and Spain. Currently, is estimated that about 2-3 million Ecuadorians are living abroad (CIA, 2013) but due to the increased unemployment within theses countries the likelihood of returnees to Ecuador is increasing. This is important for the research, because most of the people who decide to return have acquired different traditions, manners or even knowledge, which is translated directly in the way they consume. This topic, as well as, modernization and international trade will be covered in the coming chapter when analyzing Ecuador’s drivers of change as part of the effect of globalization in the transition. Additionally, the roll of women in the society is getting more important than ever, as more educated women are contributing to the work force in Ecuador at a rate of 51,3% according to the World Bank (2013d), this means that households have double income allowing thus, to cover basic needs and save or spending in non-basic products/services. But, due to the financial crisis back in 1999, the credibility of the financial system was damaged at the point that families preferred to hide the money inside the houses than depositing it in the bank. Nowadays, the reputation of the financial system is regaining its credibility reflected in a saving ratio of 3,3% of disposable income in 2012 (Euromonitor International, 2013a). Thus, even though the poverty indicator in the country has decreased from a dramatically 49,9% in 2003 to 27,3% of the population in 2012 (World Bank, 2013e), unevenness in income levels remains as one of the principal challenges for the government. Consequently, Ecuador’s GINI1 coefficient was 47,3 as of June of 2011 and according to the report of the United Nations Development Programs’ (UNDP) in 2011, Ecuador was ranked 84th out of 187 countries regarding human development (MarketLine, 2013). This is to say that, Ecuador’s 10% richest households received 51,6% of the total disposable annual income, while the 10% poorest households accounted only for 1,4% in 2011. In result, the Ecuadorian culture is considered as hierarchy- and status- conscious society that is related to the need of reaching a certain 1 The GINI coefficient is a measure of income disparity, with zero corresponding to complete equity, and 100 to extreme inequity. 23
social status by consuming certain goods. This will be further explained in the Ecuadorians’ perceptions of foreign brands. Finally, the Ecuadorian society may be considered as conservative due to the values that predominate in it; this can also be viewed as a result of the roll of religion, as 95% are Catholics (CIA, 2013). The idea of family comprises a wider number of members going from grandparents to grandchild and may be considered as a joint family system, which according to Chekki & Sethi (1989) includes three or four leaving generations, living together in the same household. Additionally, members of the family many times, share a common income, expenses and property. However, due to the increased penetration of women in the labor market, globalization and competitiveness this concept of family is being replaced by nuclear family system, which comprises individual mobility within social status or geographic locations. In this sense, members of the same family might belong to different social classes, or many times members of a family decide to move to major cities in order reach personal goals, such as education, job position, etc. These changes, which include career-oriented women and individuals pursuing personal goals, have influenced the consumption patterns in Ecuador, and currently the decision power of purchasing household items relies mostly on the women in the case of the families. Thus, when considering purchasing new furniture, the roll of women determines the final decision, whereby marketers have to target the relevant persons when planning and implementing marketing campaigns. Summarizing, the socio-economic upturn that the country is experienced, has changed certain values and behaviors in Ecuador towards development. However, central values such as collectiveness, familiar union, etc. and beliefs remain unchanged and almost impossible to change in the future. 3.3 INCOME AND EXPENDITURE This sub-section attempts to analyze the disposable income of Ecuadorian households and how they expend it; in this way the economic situation of households are well analyzed before approaching the consumer behavior. Recalling from the previous section, levels of poverty and income inequality continue to be the most important social challenges of Ecuador. However, due to the economic sustained expansion, growth in per capita disposable income and consumer expenditure levels have outpaced Latin America averages between 2006 and 2011 (Euromonitor International, 2013b) meaning opportunities for new entrants in the market, which will 24
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