the furniture industry in 2016 competitive scenarios: trends and strategic implications

THE FURNITURE INDUSTRY IN 2016 Competitive Scenarios: Strategic Trends and Implications

Authors:Jesús Navarro Campos Director of Corporate Development, AIDIMADirector of the Department of Market and Strategy Analysis, AIDIMA

Javier Iborra CasanovaFrancisco Macián Belenguer Vicente Sales VivóSol Velasco HernándezAnalysts, Department of Market and Strategy Analysis, AIDIMA.

Collaborators:Torsten Lihra. IResearch Scientist and Group Leader — Furniture, Value-Added Department — Furniture Group, FPInnovations-Forintek, Quebec (Canada).

Albert Schuler. Research Economist, USDA Forest Service, Princeton (West Virginia, USA).

Barbara Ozarska. Program Manager, High Value Wood Products, CRC Wood Innovations, School of Forest and Ecosystem Science, University of Melbourne (Australia).

Dr. Peter Hayward. Director, Strategic Foresight Program, Faculty of Business and Enterprise, Swinburne University of Technology. Melbourne (Australia).

Analistas Financieros Internacionales (Afi).

Future Concept Lab

Department of Marketing and Market Research Faculty of EconomicsUniversity of Valencia

AIDIMA and FPInnovations-Forintek wish to thank the members of the international panel of experts for their participation in the first round of CEFFOR® on future scenarios.

Design and typesetting:Nextart. Proyectos de Comunicación. www.nextart.es

ISBN: 978-84-95077-32-5Depósito legal: V-5296-2008Printed in Spain by Industrias Gráficas Ecir SL, Paterna (Valencia)Valencia, November 2008.

Within the limits established by law and subject to prescribed legal sanctions, the reproduction of this work in whole or in part by any means or procedure, whether electronic or mechanical, treatment by digital media, rental, or any other form of transfer of the work without prior authorization in advance from the copyright holders, is prohibited.

© AIDIMA, 2008. AIDIMA reserves all rights, and in particular those relating to reproduction, distribution, public communication and transformation, even partial. The information and data in this report have been duly verified. However, AIDIMA accepts no responsibility for their use.

0. PRESENTATION

1. INTRODUCTION

1.1. The furniture foresight centre (CEFFOR®) 241.2. Objectives 281.3. Structure of this publication 29

2. THE EFFECTS OF GLOBALIZATION IN THE FURNITURE INDUSTRY

2.1. Introduction 322.2. Globalization as a worldwide trend 33 2.2.1. Landmarks and phases of globalization 35 2.2.2. Dimensions of globalization 36 2.2.2.1. Economic dimension 36 2.2.2.2. Technological dimension 40 2.2.2.3. Political dimension 41 2.2.2.4. Social dimension 41 2.2.3. A divided world: High and low production costs 42 2.2.4. Anticipated evolution 442.3. Globalization in the furniture industry 45 2.3.1. Worldwide relocation of furniture production centres: The future hegemony of China 45 2.3.2. The trade deficit in furniture among countries with high production costs 47 2.4. The impact of globalization on the furniture industry in countries with high production costs 50 2.4.1. The case of the furniture industry in the United States 50 2.4.2. The case of the furniture industry in the Spain 55 2.4.3. The case of the furniture industry in the Canada 69 2.4.4. The case of the furniture industry in the Australia 76 2.4.5. Impact of globalization on the furniture industry in other countries 842.5. Conclusion: The effects of globalization on the furniture industry in countries with high production costs 94

3. PROSPECTIVE SCENARIOS FOR THE FURNITURE INDUSTRY

3.1. Introduction 1083.2. Introduction to scenario concepts 110 3.2.1. Scenario types 110 3.2.2. Time horizon: 2016 113 3.2.3. Spatial range: High cost countries 1133.3. Global socioeconomic scenarios in 2016 114 3.3.1. The six dimensions of the global context 114 3.3.2. Recent evolution of the global socioeconomic dimensions 117 3.3.3. Stability and evolutionof the global variables 134 3.3.4. Global macroeconomic scenarios in 2016 137 3.3.4.1. Trend Scenario 138 3.3.4.2. Negative scenario 142 3.3.4.3. Positive scenario 1463.4. The PREDICS® for the sectorial scenario definitions of the furniture industry 150 3.4.1. The construction of the PREDICS® model 151 3.4.2. PREDICS® as the bridge between socioeconomic scenarios and sectorial scenarios 1543.5. Sectorial scenarios of the furniture industry in 2016 157 3.5.1. Keys to interpret the scenarios 157 3.5.2. The drivers of change 158 3.5.2.1. The evolution of consumption 158 3.5.2.2. Consolidation in distribution channels 159 3.5.2.3. Improved efficiency in emerging countries 159 3.5.2.4. Selective offshore outsourcing 159 3.5.3. The Retail Brand scenario 164 3.5.3.1. Key features of the Retail Brand scenario 164 3.5.3.2. The consumer in the Retail Brand scenario 167 3.5.3.3. Consumer value in the Retail Brand scenario 172 3.5.3.4. Distribution in the Retail Brand scenario 173 3.5.3.5. The competitive environment of the furniture manufacturer in the Retail Brand scenario 175 3.5.3.6. The players in the Retail Brand scenario 176 3.5.4. The Low Consumption scenario 182 3.5.4.1. Key features of the Low Consumption scenario 182 3.5.4.2. The consumer in the Low Consumption scenario 185 3.5.4.3. Consumer value in the Low Consumption scenario 187 3.5.4.4. Distribution in the Low Consumption scenario 188 3.5.4.5. The competitive environment of the furniture manufacturer in the Low Consumption scenario 190 3.5.4.6. The players in the Low Consumption scenario 191 3.5.5. The Smart solutions scenario 194 3.5.5.1. Key features of the Smart Solutions scenario 194 3.5.5.2. The consumer in the Smart Solutions scenario 197 3.5.5.3. Consumer value in the Smart Solutions scenario 200 3.5.5.4. Distribution in the Smart Solutions scenario 202 3.5.5.5. The competitive environment of the furniture manufacturer in the Smart Solutions scenario 204 3.5.5.6. The players in the Smart Solutions scenario 206

4. MONITORING INDICATORS FOR THE 2016 SCENARIOS

4.1. Monitoring indicators for the 2016 global scenarios 2104.2. Indicators of the INTERNATIONAL POLITICAL SITUATION 212 4.2.1 Spanish outward foreign direct investment 212 4.2.2 Distance between the BRIC countries and Spain 212 4.2.3 Imports of goods and services from BRIC countries in relation to national GDP 212 4.2.4 Price of raw materials 214 4.2.5 Percentage of Spanish furniture manufacturers that manufacture part of their production abroad 2144.3 RETAILING STRATEGY Indicators 216 4.3.1 Total number of shopping centres opened on national territory 216 4.3.2 Evolution of private consumption 216 4.3.3 Market volume of furniture via concentrated distribution 216 4.4. Indicators of evolution of ECONOMIC VARIABLES 218 4.4.1 Evolution of consumption of durable goods in household furniture and fittings 218 4.4.2 Evolution of ECB interest rates 218 4.4.3 Percentage growth of furniture consumption in Spain 2184.5. Indicators of evolution of DEMOGRAPHIC VARIABLES 220 4.5.1 Average age of the national population 220 4.5.2 Percentage of furniture bought by type 2 couples 2204.6. Indicators of the level of INTERNATIONAL COMPETITION 221 4.6.1 Evolution of the global competitiveness index of BRIC countries 221 4.6.2 Foreign direct investment received in China 221 4.6.3 Chinese exports of machinery and transport equipment 222 4.6.4 Percentage of materials purchased from abroad by furniture manufacturers 2224.7. Indicators of CONSUMER ATTITUDES AND BEHAVIOUR 223 4.7.1 Proportion of inhabitants aged between 20 and 35 in the national population 223 4.7.2 Number of homes built nationwide 223 4.7.3 Ratio of consumer credit to total credit 224 4.7.4 Average period for renovating furniture 2244.8. Indicators of the evolution of SOCIAL VARIABLES AND THEIR IMPLICATIONS IN THE HOME 225 4.8.1 Growth in the number of homes nationwide 225 4.8.2 Urbanization rate 225 4.8.3 Surface area of homes of furniture buyers (in square metres) 2264.9. General table of CEFFOR® indicators for monitoring the sectorial scenarios for 2016 227

5. STRATEGIC PLANNING FOR FURNITURE MANUFACTURERS USING CEFFOR®

5.1 Introduction 2305.2 Strategic scenario planning 2325.3 Method of using CEFFOR® scenarios in defining the strategy of companies in the furniture sector 234 5.3.1 Evaluation of the current business model 234 5.3.1.1 Selecting the most likely competitive scenario in 2016 235 5.3.1.2 Impact of the scenario on the existing business model 236 5.3.1.3 The decision to change the business model 236 5.3.2 Defining a new and sustainable business model 237 5.3.2.1 Considering the consumer of the new business model 238 5.3.2.2 Considering the value proposition to be delivered to the consumer 238 5.3.2.3 Considering what price to assign to the value proposition 239 5.3.2.4 Considering the type of relationship with the distribution channel 240 5.3.2.5 Considering the core capacities and competencies of the business 241 5.3.2.6 Considering the core capacities and competencies of the business 241 5.3.3 Connection with the current situation, implementation and change management 2425.4 Annex: Self-assessment questionnaire 244

GLOSSARY 254

BIBLIOGRAPHY AND REFERENCES OF INTEREST 258

P R E S E N T AT I O N

There are over 3,500 companies of the wood and furniture sector in the Valencian Autonomous Region providing employment for nearly 40,000 people. The Comunitat Valenciana is therefore an indispensable point of reference in this industry in a Spanish and a European context: 18% of the production and nearly 25% of the exports of Spanish furniture are from the Comunitat Valenciana.

However, the furniture industry is not exempt from the process of globalization of the world economy. Changes in tastes and modes of consumption, the development of new forms of commercial distribution and an increase of the international furniture trade with the growing participation of new emerging countries with low production costs, present challenges which must be faced in order to ensure the future of the furniture industry in advanced countries.

The first step is to possess quality information in good time on the variables which will shape the sector throughout the next few years. It has to be in good time in order to enable companies to formulate strategies for innovation in the medium term, but also to enable employers’ associations, government agencies and research centres to set in motion the appropriate projects, actions and lines of research to provide the sector with effective support, all on the basis of objectives established in the light of knowledge which can only be provided by reliable information shared by all the agents in the sector.

The Conselleria for Industry, Commerce and Innovation has been developing a comprehensive policy of stimulating and supporting innovation, embracing aspects such as R&D, design, business organization, cooperation and internationalisation, and specifically embodied within this sector in facilities such as the network of Technological Institutes and the Sectorial Competitivity Plans. Through this support, the Conselleria works hand in hand with the economic and institutional agents in each sector, and its collaboration with FEVAMA (Valencian Federation of Wood and Furniture Businesses) is undoubtedly a representative example which has borne fruit in initiatives like the AIDIMA (Furniture, Wood, Packaging and Allied Trades Technology Institute), the spearhead in the provision of advanced technological services to stimulate innovation in this sector.

With the backing of FEVAMA and of the Conselleria for Industry, Commerce and Innovation, AIDIMA has developed projects like the Furniture Market Observatory and the Competitive Intelligence and Vigilance System, among others, and international cooperation initiatives within the framework of IMPIVA’s High-Level Specialisation in Industrial Technologies programme. The convergence of these two lines of activity, reinforced through events such as the ten meetings of the International Furniture and Habitat Conference, COSMU, held in Valencia, has put AIDIMA in a position to lead the coordination of a worldwide network for gathering and analysing relevant information on trends in the evolution of the furniture sector.

All of this has come to fruition in the Centro de Prospectiva del Mueble (CEFFOR®, known as the Furniture Foresight Centre in English), led by AIDIMA together with its strategic partner FPInnovations-FORINTEK Division, in Canada, and with the participation of CRC-Wood Innovations at the University of Melbourne, in Australia, countries whose furniture industries share similar characteristics, difficulties and potentialities to those of the Comunitat Valenciana in relation to the globalization of this sector.

The present publication, produced within the ambit of CEFFOR®, on future scenarios in the furniture industry, constitutes the tangible result of an effort to equip ourselves with advanced information that will enable us to formulate an industrial policy in accordance with the principles of optimisation and sustainability.

All in all, CEFFOR® represents a commitment to a sustainable future for the furniture industry in the most advanced countries of the world facing the challenge of globalization. A response which must also be sought within the framework of internationalization that can enable companies and the institutions that support them to reap the benefits of a worldwide cooperation in order to provide the market with products which are better suited to its characteristics, and to do it in the most possible competitive way.

Belén Juste PicónHon. Consellera for Industry, Commerce and Innovation

Valencian Regional Government

PrefaceHon. Consellera for Industry, Commerce and Innovation, Valencian Regional Government, Spain

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Furniture manufacturers, just like other manufacturing sectors throughout Europe, are going through a series of difficulties as a result of factors such as the upsurge of countries with emerging economies, the expansion of the European Union and globalization in general. If we take a look back, the world has changed substantially in just a few years. There has been a succession of advances in technology and innovations soon become obsolete. The important thing for companies is no longer having a competitive advantage for a given period, but their strategic ability to modernise continuously.Those of us who are in the furniture business know that we need “a new business model”, a new competitive model based on innovation and knowledge. We have to combat the fact that our costs are no longer competitive compared with other countries; we have a real need for innovation, specialization and cooperation. With the advent of globalization our sector has to manufacture value. We are immersed in a new scenario of intangible factors, in which information, knowledge, brand, design and new distribution and marketing strategies are the major assets which enable a company to offer a competitive advantage, a distinctive element. We are aware of the importance of innovation and training as factors for change. The most appropriate term of all is innovation, a fundamental question for business management and a powerful lever with which to move the world. We know we have to make it possible for scientific progress and technological advances to be translated into productivity. We have to be capable of turning information into knowledge and knowledge into wealth.

This is therefore a crucial moment for us to think things over, gain fresh impetus and design clear strategies and objectives. That is why the activity being carried out by the Furniture Foresight Centre, CEFFOR®, led by the wood and furniture technology institute AIDIMA in Spain and FPInnovations-Forintek in Canada, with the collaboration of the University of Melbourne in Australia, is so important. It is a real strategic alliance, based on cooperation, which is making it possible to construct a whole system of worldwide study and analysis of competitive scenarios for the furniture industry on a 10-year timescale.

Obviously we do not have definite answers about the future, but facing the current uncertainty, scenario planning becomes a powerful tool, because it enables us as businesspeople to anticipate future scenarios for our companies in a continuously and rapidly changing world. In this book we can find multiple possible futures, alternative accounts of how the global environment may evolve in the next ten years. We shall find a wide range of possible events, a set of scenarios, which will broaden our field of view and help us to evaluate the strategic options in preparation for decision-making.

We have in our hands a book containing valuable and novel information. I would like to thank and congratulate to AIDIMA and FPInnovations-Forintek for the great contribution that they have made to furniture manufacturers by providing them with this book, because, in short, it is spurring us on to act and to anticipate events, it shows us different representations of our future, and stimulates us to think about what is happening and what might happen, what we should do and what we should avoid. Envisaging multiple future scenarios enables us to decide what needs to be done today by imagining tomorrow. No-one can predict the future; it is not written anywhere. It is a reality which still has to be created.

Vicente Folgado TárregaPresident, FEVAMA

PrefacePresident of FEVAMA (Valencian Federation of Wood and Furniture Businesses), Spain

The furniture industry in 2016

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MANAGING COMPANIES IN DIFFICULT TIMES

The creation in 1998 of the OM (Furniture Market Observatory), the first industrial market observatory in Spain, which is just now celebrating its tenth anniversary, coinciding with the tenth International Habitat Conference, COSMU 2008, was the foundation stone of the Competitive Intelligence system promoted by AIDIMA. Up until then we had information on the recent past and very short-term expectations; the sector was growing in 1998 at 13% and now shows negative growth, and the short-term prospect is one of uncertainty and turbulence, with an overvalued euro, high oil prices and high interest rates.

In these current circumstances it is now more important than ever to have access to the maximum possible information of the highest possible quality in order to minimise the risks inherent in business management. For this purpose we have founded the global Furniture Foresight Centre, CEFFOR®, which has firmly established itself in this case as the spearhead of a system of competitive intelligence information, thereby making the Spanish furniture industry a privileged sector by virtue of having at its disposal one of the most advanced information systems in the world.

The information provided by CEFFOR®, put together by the leading international furniture specialists and experts, offers companies a useful guide when planning their strategy and a clearer and more rigorous identification of the competitive environment and the threats and opportunities they face.

Thus we know that the priority is not only to produce a lot and produce it well, but to sell with high quality and value added, especially perceived added value, and also, most essential of all, to produce what people want to buy. In order to do so we need to know how consumer taste evolves, and observatories like CEFFOR® can help us by showing us likely scenarios that can enable us to see ahead and gain a real knowledge of consumer trends.

The success of the furniture and wood industry must be attributed to the ability of those in the business to value technology, talent, knowledge and tolerance. We are speaking of businesspeople of today who have the vision to employ a highly qualified workforce, well trained and orientated towards innovation, research, sustainable development and design.

Our industry has a long history, as long as the human race has lived on earth, and it has a long future ahead, as long as we choose. This is therefore the time to create a “new future” for ourselves in which R&D&i will be the essential factor in boosting the competitiveness of companies, which will be able to overcome the limitations of their small size by utilising modern management and business organization systems and changing towards an open mentality.

We at AIDIMA encourage companies to use the Foresight Centre, facilities such as the Spanish Furniture Market Observatory and the Habitat Trends Observatory, and other high value-added tools in the Competitive Intelligence System which have proved their effectiveness, so that in this way, equipped with the appropriate information, they can take decisions that will guarantee greater stability for our companies and organizations. We in return are grateful for the support received from employers’ associations and the government and civil service, and especially from the Valencian Regional Government, in bringing this great project called CEFFOR® to fruition.

Vicent Martínez SanchoPresident, AIDIMA

Letter from the President of AIDIMA(Furniture, Wood, Packaging and Allied TradesTechnology Institute), Spain

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AIDIMA (Furniture, Wood and Packaging Technology Institute) is a research association which is a legal entity in its own right, as a private, non-profit-making business association of national and international scope. Established in 1984, it is recognised by the Interministerial Commission for Science and Technology as a research association and as a centre for innovation and technology.

The corporate mission of AIDIMA is to contribute to the increased competitiveness of the Spanish furniture, wood and allied industries, as well as the packaging and commercial transportation sector, basically in all aspects related to quality, technological innovation, training, information, security and the environment, improving management in general, especially in the areas of design, production and marketing and strengthening exports.

AIDIMA is a member of REDIT and FEDIT (the Valencian and Spanish networks of technology institutes) and is part of the OTRI network (the Spanish universities’ Office for the Transfer of Research Results). It is also a member of the governing body of AENOR (Spanish Association for Standardisation and Certification) and participates in several standardisation committees (UNE, CEN, ISO). In the packaging field, AIDIMA is a member of IAPRI (International Association of Packaging Research Institutes) and of EFPRO (European Fibre and Paper Research Organization).

AIDIMA is recognised by the European Union as a centre of excellence for the wood, furniture, packaging and allied trades sector, and regularly participates in European R&D and training projects and in activities related to the spread of innovative technologies. On an institutional level, AIDIMA is the current president of INNOVAWOOD, the European R&D and Training Association for the Forestry, Wood and Furniture Industries.

In the field of market analysis and strategic management, AIDIMA has a solid record in the creation and implementation of competitive intelligence systems for the furniture and wood industry, beginning with the foundation of the Spanish Furniture Market Observatory in 1998, as well as in consulting services for companies in the sector. AIDIMA has promoted the establishment of the Furniture Foresight Centre (CEFFOR®) since its initial stages in 2005, and currently leads it on an international level.

Presentation of AIDIMA(Furniture, Wood and PackagingTechnology Institute), Spain


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Preface from the President of AFMQ(Quebec Furniture Manufacturers Association)Canada

The mission of the Quebec Furniture Manufacturers Association is to promote the industrial, commercial and economic expansion of the furniture industry. Thanks to AFMQ’s activity, Quebec’s furniture industry currently possesses innovative development tools based on research and development, as well as on innovation. These tools effectively support manufacturers in their efforts to maintain their competitive position, both here and elsewhere, and to respond better to the needs of the market and of consumers.

In this connection, AFMQ has devoted many efforts over the years to building connections linking the major players in our industry to local and international associates of all kinds. These efforts, which have been fruitful in many respects, have mainly served to promote the establishment of a lasting relationship between FPInnovations-Forintek, a key player in the development of our industry, and the AIDIMA Institute in Spain, the instigator and the driving force behind the CEFFOR® project. This collaboration will enable our company executives

to have access to essential strategic information in order to acquire a better understanding of the worldwide economic issues that affect them and to adjust their business model accordingly. They will thus be better equipped to take sound decisions, develop bold strategies and imagine innovative solutions, which are the only possible ways to achieve success in the context of highly competitive international markets.

Because innovation remains the central point, manufacturers in Quebec must constantly improve their ability to respond to the expectations and demands of consumers. For all these reasons, AFMQ resolutely supports the initiatives being undertaken by CEFFOR®.

Jean François MichaudPresident and Managing Director

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FPInnovations-Forintek Division is proud to work in close collaboration with Quebec’s furniture industry and to contribute to the development of innovative solutions designed to enhance the competitiveness of this sector, which is crucial for several regions of Quebec. Economic globalization poses great challenges. It is been proved time and again that innovation is the only thing that can help our manufacturing industry to develop in such a way as to satisfy the needs of consumers, who show evidence of being increasingly demanding and open to the world.

Being aware that countries without access to low-cost labour face similar problems, FPInnovations-Forintek Division is taking a great interest in developing collaborative alliances with other research organizations with the aim of consolidating and strengthening the range of research available to its members from the furniture industry. Thanks to the leadership of AIDIMA, CEFFOR® offers a foresighting tool of great interest which will help company executives in the furniture sector to attain a better grasp of the effects of the key variables in our world economy that determine policy-making in the industry. The information generated, through a collaborative approach involving over 200 experts working in five different areas, constitutes a contribution to defining companies’ strategy with a view to anticipating changes in the configuration of their own business model.

This international collaboration will make it possible to improve the exchange of information and ideas within a rigorous research framework and will reduce delays in implementing projects, something that can only benefit company executives. The furniture industry in Quebec faces greater challenges than ever before in its history. Innovation is the key to survival. Only the unique character of its products, methods and business models can guarantee its future. International collaboration within the framework of CEFFOR® plays a fundamental role in generating innovative ideas, an initiative with which FPInnovations-Forintek Division is proud to be associated.

Hervé DeschênesVice President of FPInnovations-Forintek

Letter from the Vice President of FPInnovations-ForintekCanada


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Presentation of FPInnovations-Forintek, Canada

FPInnovations-Forintek is an institute for research on wood products in Canada. It is a non-profit-making organization, whose mission is to support the forest resources derivatives industry in optimising its production processes, obtaining higher-value products from current resources and satisfying the expectations of customers in terms of functionality, durability and market accessibility.

The strategic direction of the institute is established through its Board of Directors. On the basis of the priorities identified by members from the forest industry and their governing bodies, FPInnovations-Forintek provides technological solutions in areas such as wood management, panels and other value-added products derived from wood, production processes, and features such as drying and protection, construction systems, etc.

FPInnovations-Forintek also carries out economic and market studies and plays an active part in developing codes and standards for the industry at a national and international level.

FPInnovations-Forintek’s two centres, in Vancouver and Quebec, serve to help meet the needs of companies, and have the same functions. Geographically, Vancouver covers Western Canada from the Manitoba-Ontario border to British Columbia, while the Quebec laboratory covers the east of the country. The rationale behind this division is to maximise efficiency in delivering solutions tailored to each region of the country, and also in technology transfer. Indeed, members of Forintek in each province of the country, as well as those in the United States, have immediate access to all the organization’s resources at both its centres, whether these are of a scientific and technical character or are related to industrial consulting or managerial questions.

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Working Group

The Furniture Foresight Centre is composed of a broadly-based team of professionals with knowledge and experience in different areas of company management and the competitive environment in the furniture industry. Moreover, the international character of the Furniture Foresight Centre ensures the participation of international agents with a global overview of the sector, contributing to the corroboration and validation of the research carried out for the compilation of this publication.

AIDIMAGeneral Coordinator of CEFFOR®

Jesús Navarro Campos

Director of Corporate Development, AIDIMA.

Director of the Department of Market and Strategy Analysis,

AIDIMA.

Equipo técnicoAnalysts, Department of Market and Strategy Analysis, AIDIMA.

J.Javier Iborra Casanova

Francisco Macián Belenguer

Cristina Revert Carreres

Vicente Sales Vivó

Beatrix Szirmay

Sol Velasco Hernández

Knowledge AreasStrategyJ. Javier Iborra Casanova. Analyst, Department of Market and

Strategy Analysis, AIDIMA.

R&D Research and Development. Jose Vicente Oliver. Director of the International R&D Division of AIDIMA

MaterialsRosa Pérez Campos. Director of the Materials Laboratory,

AIDIMA.

Logistics and ProductionJavier Turégano Gómez. Director of the Packaging and

Commercial Transportation Division, AIDIMA.

MarketingVicente Sales Vivó. Department of Market and Strategy Analysis,

AIDIMA.

Human ResourcesMarisé LLaudes Llaudes. HR Director of Training

and Development, AIDIMA.

Information TechnologiesMª José Núñez Ariño. Director of Information

Technologies, AIDIMA.

INSTITUTIONAL COMMITTEE

Mariano Pérez Campos. Director of AIDIMA.

Jose Manuel Boronat Ramón. Deputy Director of AIDIMA.

Rafael Perez Bonmatí. Secretary General of FEVAMA.

FPINNOVATIONS-FORINTEK

CEFFOR® Coordinators in North AmericaGerald BeaulieuDirector of the Value Added DepartmentFPInnovations-Forintek.

Project managers, FPInnovations-ForintekDanielle Carle and Maude Baron, Project managers. FPInnovations-Forintek.

Technical TeamTorsten Lihra. Research Scientist and GroupLeader, Furniture.

Danielle CarleMaude Baron

Knowledge AreasMarketingStéphane Deveault, Association des fabricants de meuble du QuébecMaterialsM. Yves Desssureault, Centre de recherche industrielle du QuébecLogistics and ProductionMattheus Pinotti. Researcher, For@C, Université Laval.


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External contributions

The following professionals and national and international bodies have contributed to the compilation of this publication:

Drafting of case studies on the effects of globalization on the furniture industry:

· Albert Schuler. Research Economist, USDA Forest Service,

Princeton (West Virginia, USA).

· Barbara Ozarska. Program Manager, High Value Wood Products,

CRC Wood Innovations, School of Forest and Ecosystem Science,

University of Melbourne (Australia).

Analysis of global macroeconomic and social scenarios:· José Antonio Herce. Analistas Financieros Internacionales

(AFI) (Madrid, Spain).

· Francesco Morace. Future Concept Lab (Milan, Italia).

Demographic projections in Spain:· Department of Marketing and Market Research Faculty of

Economics, University of Valencia.

Strategic planning by scenarios:· Dr. Peter Hayward. Strategic Foresight Program, Faculty of

Business and Enterprise, Swinburne University of Technology.

Melbourne (Australia).

Contributions from institutions of the furniture sector:· FEVAMA (Valencian Federation of Wood and Furniture)

Businesses) (Valencia, Spain).

· UEA (Union Européenne de l’Ameublement) (Brussels, Belgium).

· FEDERMOBILI (Milan, Italy).

· INNOVAWOOD (Dublin, Ireland).

· CASA DECOR (Madrid, Spain).

· WOOD TECHNOLOGY INSTITUTE (Poznan, Poland).

· UNIVERSITÉ LAVAL (Quebec, Canada).

· FURNITURE TODAY (High Point, N.C., United States).

· THE FURNISHING INDUSTRY ASSOCIATION OF AUSTRALIA

(Newington NSW, Australia).

AFMQ (Quebec Furniture Manufacturers Association) (Quebec,

Canada)

CEFFOR® International Panel of ExpertsAIDIMA and FPInnovations-Forintek wish to thank the members of

the international panel of experts for their participation in the first

round of CEFFOR® on future scenarios.

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INTRODUCTIONThe Furniture Industry in 2016. Competitive Scenarios:Strategic Trends and Implications

01

1.1. THE FURNITURE FORESIGHTCENTRE (CEFFOR®).

The Furniture Foresight Centre is a centre for generating foresight information in a permanent form, founded by AIDIMA in collaboration with FPInnovations-FORINTEK (Canada) and the University of Melbourne (Australia), with the mission of analysing competitive scenarios and future business models in the furniture industry with the help of a panel of experts from all over the world.

CEFFOR® came into being as a result of AIDIMA’s initiative in 2005 to create an international centre which would make it possible to anticipate the evolution of the furniture sector in the following decade. This initiative arose out of concerns associated with a series of changes which affected the competitiveness of the furniture industry in countries like Spain, and which have transformed the competitive conditions and the market environment of furniture manufacturers. Far from being temporary, isolated changes, the phenomena observed from the start of the new century affect structural conditions in the furniture industry, with a major impact on countries with high production costs.

Among the events that have transformed the structure of the industry, the most significant are those mentioned in the diagram on the next page (See diagram).

Additionally, these changes have been accompanied by others which have modified worldwide economic and competitive conditions: the appearance of China as a major player has resulted an increase of the prices of raw materials, and by the same token the flow of investment has been directed primarily towards China and the countries of Southeast Asia, helping to generate a global current which has propelled these countries to the point of being considered world manufacturing centres.

The changes mentioned have altered the traditional patterns of relationships and behaviour among agents in the furniture sector in recent years. In particular, countries with high production costs have obviously been placed at a disadvantage. The enormous cost differential (in labour, infrastructure, administration...) between emerging countries and Europe or North America has given rise to an increasing transfer of productive activity from the latter to the former. In some cases, as can be seen in the case of the United States, which we shall explain in this publication, the consequences have been dramatic, with company closures and heavy losses of jobs and market share, even at domestic soil.


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On the supply side

• The increasing commercial openness of emerging countries and the realisation of their potential as world manufacturing centres. In 2004 furniture imports in Spain exceeded exports for the first time, and in 2007 furniture imports in Spain amounted to 33.5% of total domestic furniture production.

• The rise of China, in particular, as a world power in furniture manufacturing, and its progress up the international league table of producer countries. Furniture and components manufacturing in China accounted for 6.07% of the world total in 2003, but three years later, in 2006, the percentage stood at 12.10%, ahead of Italy and Germany and exceeded only by the United States.

• The gradual decline in the rate of growth of domestic furniture production in Spain, to the point of reaching a state of stagnation in 2001. While furniture imports have continued to increase, domestic production displays a sluggishness which even went into negative figures in 2002. Moreover, if growth figures in the industry are considered in real terms (discounting annual inflation), the picture is one of a continuous loss of dynamism in annual furniture production.

On the demand side

• The evolution of consumer taste, which has altered from a preference for a classical type of style (solid wood, handcrafted details and ornamentation, one-piece furniture...) towards a taste for simpler contemporary furniture (based on chipboard panels faced with melamine or veneer, with straight, simple lines and modular construction...). In this change of taste among the new generations one can detect the influence of designs from other countries (mainly Scandinavian design), but it is also the result of the social changes experienced in Spain during recent decades (reformulation of family structures, smaller dwellings, decreased stability in family relationships, moving home more frequently, etc).

• The gradual process of concentration in furniture distribution, starting with internationally known brands, which has facilitated an increase of scale, the construction of logistical platforms, and consequently the possibility of increasing the percentage of a product that can be stored by the distributor and put on sale directly to the consumer (in 2008 concentrated distribution channels account for nearly 70% of all furniture distribution in Spain). This has been encouraged, moreover, by the fact that consumer taste has inclined towards modular furniture with straight lines, which is more readily transported from one country to another.

TRANSFORMATIONS OFTHE STRUCTURE OF THE FURNITURE INDUSTRY IN SPAIN

Introduction

25

In the case of Spain, the furniture manufacturing sector has reached a phase of maturity which poses a serious cha-llenge for the next few years (stagnation of sales, declining profitability of companies, minimal product differentiation, fragmentation of the sector, etc.). Faced with this situation, the question arises as to whether this is the prospect that awaits the furniture industry in countries with high produc-tion costs, or whether, on the contrary, there are alternatives that might restore the industry’s competitiveness and enable it to get into a position to enjoy good commercial health in the next few years.

The above concerns led AIDIMA to launch the project scope of CEFFOR®, which is based on the following principles:

- Structural changes in the furniture industry in developed countries.- Impact of globalisation on furniture manufacturers’ business model.- Anticipating the competitive environment in the next few years.- High value-added strategic information for companies.- Sustainability of companies.- Pioneering experiment in designing industrial policy.

- Worldwide reach.- Intercontinental strategic partners (Spain, Canada and Australia).- More than 200 internationally prestigious sectorial and non-sectorial experts.- External collaborators: Analistas Financieros Internacionales (AFI), Future Concept Lab.- Usefulness and applicability at company and institutional level.

- Complementarity with the Competitive Intelligence and VigilanceSystem for the furniture industry created by AIDIMA in 1998.

- Permanent information system.- Foresighting methodology applied to the furniture industry in

collaboration with LIPSOR (France) and Swinburne University (Australia).- Cross-checking of results with the CEFFOR® panel of experts.- Linkage to AIDIMA’s research projects, updating the institute’s areas

of knowledge.

RIGOUR

SCOPE

IMPORTANCE

PRINCIPLES OF CEFFOR®

Anticipation and long-term subsistence

Focusing on furniture manufacturers’ business models

Perspective of countries with high production costs

International character

Methodological rigour and cross-checking of results

Sustainability

Usefulness and application


26

- Anticipation and long-term subsistence:

So that it thereby complements the competitive intelligence system created by AIDIMA some years ago with a short-to-medium-term approach (Spanish Furniture Market Observatory, Systematic Consumer Study). Adopting a sectorial foresighting approach becomes a necessity, since this is the most highly-developed discipline with a track record of applications in other sectors, making it possible to define future scenarios for the furniture sector. In this sense, the decisive impulse behind CEFFOR® arose in 2006, and for this reason the time horizon for defining the scenarios was set ten years ahead, in 2016.

- Focusing on furniture manufacturers’ business models:

So that the ultimate objective of CEFFOR® is to contribute to manufacturers’ strategic management, as agents in a weaker position with a greater risk of losing competitiveness in the long term. The sectorial scenarios must therefore make it possible to think about manufacturers’ business models, providing basic information for developing differentiation strategies.

- Perspective of countries with high production costs:

So that the companies to which CEFFOR® is addressed are those located in developed countries, especially companies in the Comunitat Valenciana and in Spain, as well as the partner countries in CEFFOR® (Canada, Australia).

- International character:

For this reason CEFFOR® has been defined from its inception as a project of international scope, interpreting this dimension in terms of three complementary aspects: 1) international by virtue of the level of research, which covers the situation of the furniture industry throughout the world, though concentrating on analysis of repercussions for the sector in developed countries; 2) international in terms of the participation of sectorial and generalist experts from all over the world, who contribute complementary perspectives that make it possible to take account of all the critical variables for the evolution of the sector; 3) finally, international because of the international partners who are participating in CEFFOR®, representing other developed countries (so far, Canada and Australia) where the situation of the furniture industry is suffering from the same symptoms as in Spain.

- Methodological rigour and cross-checking of results:

Because despite the difficulty of foreseeing the future, there are specific techniques and methods that make it possible to think about the future on a serious and responsible basis. For this reason, the development of CEFFOR® has involved the collaboration of the principal foresighting research centres of the world (LIPSOR in Paris, Swinburne University in Melbourne). Similarly, the conclusions reached by CEFFOR® have been obtained using an international panel of experts who have contributed their vision and experience of the furniture industry and whose involvement guarantees the relevance of the results.

- Sustainability:

Because furniture manufacturers need a business model that is sustainable over the next few years. This sustainability is to be understood in its three facets, economic, social and environmental, and therefore the considerations of CEFFOR® must provide basic information and guidance to enable companies in the sector to grow and develop their activity in the next few years, incorporating differential elements into the definition of their business, their human resource needs and their relationship with the environment.

- Usefulness and application:

Because far from limiting itself to reflections of a strategic nature, CEFFOR® was created to be incorporated into the decision-making of agents in the sector. On the one hand, companies should find that CEFFOR® is their essential guide to defining strategies and revising the furniture business model in the twenty-first century. On the other hand, the future scenarios for the sector make possible to orientate sectorial policies proposed by the government and civil service in order to guide companies towards a scenario of competitiveness and differentiation.

In short, CEFFOR® is AIDIMA’s initiative to anticipate the evolution of the furniture industry in the next decade. It originated from the shared idea that advance planning and innovation in business management are essential to the sustainability of companies in this sector.

Introduction

27

Since 2005 a number of stages have been completed and certain landmarks have been reached in the development of CEFFOR®, principally the followings:

2005 - International case analysis of the furniture industry in the

United States and of the effects of globalization.- International workshop in Raleigh (USA) to identify the

critical variables affecting the evolution of the furniture industry.

- Study mission to China.

2006- International creation and protection of the CEFFOR® trademark.- Collaborative agreement with centres in Canada and

Australia to participate in CEFFOR®.- Holding of international workshops (Brussels, Melbourne,

Perth) to identify critical variables and reflect on the evolution of furniture markets.

- First study on perceptions of furniture distribution in relation to the quality of imported products.

- Presentation of international case studies by experts from CEFFOR® at the 8th meeting of COSMU (the International Furniture and Habitat Conference).

2007- Launch of the CEFFOR® website on the Internet.- Workshops on foresighting methodology with members of

LIPSOR.- Definition of global macroeconomic scenarios for 2016.- Sociological research study on consumer trends and weak

signals with the potential to develop in subsequent years.- Definition of the PREDICS® model for sectorial analysis

and factorisation of the critical variables in the evolution of the furniture industry.

- Implementation of the first round with experts on the competitive environment in furniture. Definition of sectorial scenarios.

2008- Institutional mission to Quebec (Canada) to set in motion

a committee composed of public and sectorial institutions in Spain and Canada to enable the results of CEFFOR® to be applied to decision-making on industrial policy.

- Institutional mission to Australia and New Zealand. - Publication of the sectorial scenarios for furniture.

1.2. OBJECTIVES

The mission of CEFFOR® is to contribute to the sustainable; economic, social and environmental development of the furniture industry in countries with high production costs, by offering foresighting information to companies for strategic management and to the social agents who play a part in defining industrial policy for this sector.

Within the framework of this mission, it includes the following objectives: • To evaluate the competitive evolution of the furniture

industry in emerging countries, assessing the competitive differential that exists by comparison with developed countries.

• To identify the key future variables that can guarantee the economic, social and environmental sustainability of the furniture sector in countries with high production costs.

• To define the competitive scenarios for the furniture sector in a time horizon of ten years.

• To monitor in the present the possibility level of occurrence of the competitive scenarios.

• To formulate strategic recommendations for companies within the ambit of the sector and for the sectorial associations and public bodies responsible for policy of the industry.

In particular, this publication addresses the objectives of identifying the key variables and defining the sectorial scenarios for the furniture industry in 2016.


28

1.3. STRUCTURE OF THIS PUBLICATION

The conclusions presented in this publication are the result of two years of work and research at an international level, collecting information and opinions on the evolution of the furniture industry which are then organized and analysed using foresighting techniques.

Following this Introduction, Chapter 2 is devoted to globalization and its impacts on furniture manufacturers in developed countries. On the one hand, the chapter considers the dimensions and contexts of globalization, and then and then explains how a series of indicators in the furniture sector have evolved during the last few years as a result of global competition. In addition, it presents four case studies in which the impacts of globalization on the furniture industry in countries with high production costs are analysed. Firstly it presents the case of the United States, where the effects of globalization have already been occurring for some years, making this case an example of what may happen in the industry in other advanced countries. The next three cases are those of Spain, Canada and Australia, where globalization is beginning to happen in the manufacturing sector. It should be pointed out that these case studies have been compiled with the special participation of leading experts in the sector from each country. The chapter concludes by reflecting on the situation that the sector is facing as a result of globalization, to which are added a series of opinions about the question from professionals representing various sectorial institutions.

Chapter 3 addresses future scenarios to the furniture industries in Spain and Canada. To this end the PREDICS® analytical model is explained, created specifically to define scenarios for the furniture sector. The model also enables us to relate the macroeconomic factors that define the global competitive environment to the factors affecting the sectorial environment. This makes it possible to assess the impact of socioeconomic variables for the furniture industry in the next few years. The chapter introduces the concept of a “scenario” and explains its usefulness in the context of economic foresighting. As next step it presents the global socioeconomic scenarios, anticipating the possible future evolution of their variables as well as the differences between various regions of the world. All this is by way of preamble to the crucial part of this publication: the presentation of the sectorial scenarios for furniture in 2106. Three possible scenarios are put forward for the furniture industry: first, a trend scenario called Retail Brand, which involves a continuation of the current situation in the furniture sector;

second, a negative disruption scenario named Low Consumption, which speculates on the possibility that we might be heading for a situation of Low Consumption and total loss of competitiveness in furniture; and third, a positive disruption scenario, called Smart Solutions, where market conditions and advance planning by companies make it possible to develop innovative business models based on the needs of consumers. The description of the scenarios starts from a general description of consumption in 2016, followed by an in-depth examination of the characteristics of consumers, distribution and the competitive environment for each scenario, pointing out their differences. Each scenario concludes by identifying the essential players in the furniture sector in 2016, which contributes to a better understanding of the type of strategies and actions that companies have to adopt in each scenario.

The conceptual exposition of the scenarios is continued on a practical level in Chapter 4, which presents a system of indicators for measuring and monitoring the variables that define the sectorial scenarios. To this end the chapter defines both general and sectorial indicators, explains the justification for this choice and characterises their evolution in figures. This makes possible to progress from the concepts set out in Chapter 3 to real data that enable us to establish which scenario the furniture industry is heading towards in countries with high production costs.

Chapter 5, in turn, represents the practical implementation of the research of in the furniture industry. This chapter addresses the integration of foresighting information into the strategic planning process of the enterprises. The various subheadings of the chapter explain how the scenarios can help companies to define their business strategy, emphasising the implications for furniture manufacturers’ business models. These deliberations are of the greatest importance, especially if the business model is evaluated from the perspective of sustainability, so that a company’s activity is guaranteed for the next few years by virtue of having found differential advantages that are sustainable over time. The chapter concludes with a series of considerations on how to conduct the process of change required to implement a suitable business model for each scenario.

Finally, the publication includes an executive synthesis, a glossary of terms presented in the course of the publication and a reference bibliography of the topics discussed.

Introduction

29

t h e f u r n i t u r e i n d u s t r y i n 2 0 1 6

THE EFFECTS OF GLOBALIZATIONin the furniture industry

02

2.1. INTRODUCTION

Globalization is fundamentally an economic process consisting of the increasing integration of different national economies into a single world market economy. The effect of globalization is to act as a force promoting structural change and to modify the conditions of competitiveness in markets, which is why it affects the progress of countries at the present time. Globalization involves a redefinition of traditional roles and the appearance of new players on the world stage, altering political, social and economic conditions in particular countries.

Understanding what globalization is, how it evolves and what underpins its expansion is the aim of this chapter. The chapter provides a detailed analysis of the effects of globalization in the furniture industry, especially in high cost countries. After reviewing the principal world trade and production indicators for furniture, it sets out the consequences that globalization is having in the countries with of high production costs, through a detailed description of case studies about four countries (United States, Spain, Canada and Australia). The chapter concludes with a description of the consequences that the globalization process has had for the furniture industry.2.2. GLOBALIZATION


32

AS A WORLDWIDE TREND.

Ever since the economist Theodore Levitt popularised the term in 1983 in his article “The Globalization of Markets”, globalization has become a synonym for the integration of different countries’ economies. However, it is a historical process resulting from human innovation and technological progress which has effects in the economic, financial, political, cultural and environmental spheres and whose intensity and forms vary over time. One can therefore state that globalization is a process which is always underway and which is more dynamic in certain periods, especially as regards international trade and financial flows.

In recent years what really does appear to be new is a series of changes that are driving the current wave of globalization and are mainly connected with the progressive withdrawal of trade barriers, the deregulation of financial markets, the revolution in communication technologies and the advance of the information society.

Among the principal causes behind the emergence of the current wave of globalization are:

• Technical and scientific progress, especially advances in the field of telecommunications and communication in general, and a consequent reduction of costs.

• Widespread use of transport at an international scale.

• The strong development of demand for goods and services, as well as the greater wealth of the population and the increase of life expectancy, which lead to more developed markets.

As a result, an increasing interdependence has arisen between the economies of the world, and the markets, societies and cultures have become unified. Thus modes of production and movements of capital are shaped on a global scale. Within this frame a major increase of international trade and investments have taken place, due to falling tariff barriers and the interdependence of nations. The main effects could be felt in most of the sectors, particularly affecting more the traditional sectors, both in terms of production (development of worldwide networks of subcontracting, offshoring, etc.) and in knowledge management and greater mobility of resources (capital, raw materials, human resources, etc.). In parallel with this, governments have lost some of their powers with the advent of what has been called the “network society”. Indeed, one effect of this process of globalization is the change that has taken place between the authority of the State and the power of market forces. The State is increasingly impotent in front of high capital mobility, altering the balance between public and private decision making.

Globalization is usually considered to be a beneficial process for economic development, even when it entails inevitable changes in traditional structures. In those countries which have begun to open internationally, economic growth is more rapid and poverty decreases. For example, most of the countries of Southeast Asia, which were among the poorest of the world 40 years ago, have become dynamic and prosperous as a result of applying policies of openness to the outside world. Similarly, as living conditions are improving it is possible to further the democratic process and, at social level to achieve progress in questions like the environment or working conditions. By contrast, during the 1970s and 1980s many countries of Latin America and Africa applied policies geared to the domestic sector and their economies stagnated or deteriorated, poverty worsened and high inflation became the norm. In many cases, especially in Africa, the problems were aggravated by adverse external factors.

2 · The effects of globalization in the furniture industry

33

Therefore, in spite of the opportunities it offers, the benefits of globalization are not shared equally, given that some countries are integrating into the world economy more rapidly than others and are able to take advantage of the current conditions. The resulting inequalities are part of the downside of globalization, since in some cases the disparities between the economic and social development of countries or in their competitiveness conditions are widened, something that is often the main object of the criticisms levelled at the globalization process. The crises that were unleashed in emerging markets during the 1990s showed that the opportunities offered by globalization carry the risk of volatile capital flows and deterioration of the social, economic and environmental situation.

Voices are heard both for and against globalization. Far from being contradictory, they reflect two sides of the same coin. For the furniture industry, as we will see later on, globalization has positive consequences, but also brings about profound modifications that pose inescapable challenges for companies.

“Globalization is the great economic event of our era. [...] It is bringing now unprecedented opportunities to billions of people throughout the world.”

Martin Wolf, Financial Times, author of Why Globalization Works.

“The world is being flattened. I didn’t start it and you can’t stop it, except at great cost to human development and your own future. But we can manage it, for better or worse.”

Thomas L. Friedman, author of The World is Flat: A Brief History of the Twenty-First Century.

“If globalization is to succeed, it must succeed for poor and rich alike. It must deliver rights no less than riches. It must provide social justice and equity no less than economic prosperity and enhanced communication.”

Kofi Annan, Secretary General of the United Nations from 1997 to 2006, winner of the Nobel Peace Prize in 2001.

“In truth, the world is not nearly as connected [...] just a fraction of what we consider globalization actually exists. The portrait that emerges from a hard look at the way companies, people, and states interact is a world that’s only beginning to realize the potential of true global integration.”

Pankaj Ghemawat, Professor at Harvard Business School and at IESE, expert on global strategy and author of Redefining Global Strategy.

THE FACES OF GLOBALIZATION


34

2.2.1. LANDMARKS AND PHASES OF GLOBALIZATION

The globalization process has existed in various different periods, though with its own particular characteristics at each stage. Three phases are usually recognised as foreshadowing the current globalization process:

The first phase of globalization spans the period between 1870 and 1945 and is characterised by great mobility of capital and labour, together with a trade boom based on a dramatic reduction of transport costs, rather than by free trade. This phase of globalization was curtailed by a series of economic crises, particularly the Great Depression of 1929 and the two world wars.

A new period of global integration began after the Second World War.This second phase of globalization took place between 1945 and 1969 During this phase a great effort was made by the international community to set up international institutions for political, financial and commercial cooperation (United Nations, International Monetary Fund, World Bank), beginning a process of progressive liberalization of commodity markets. Particularly noteworthy was the signing of the General Agreement on Trade and Tariffs in 1947

(GATT), the forerunner of the World Trade Organization, the body that currently regulates the world trade. The first oil crisis in 1973, marks a turning point, with macroeconomic changes and capital mobility. There was a notable expansion of trade in manufactured goods among developed countries between 1971 and 1975, resulting a great variety of models of economic organization, though with limited mobility of capital and labour.

The last quarter of the twentieth century saw the consolidation of a third phase of globalization which extends up to the present and its main characteristics are:

• The gradual spread of free trade between countries, affecting the majority of productive sectors.

• The growing presence of transnational companies at the world stage which function as integrated production systems.

• High capital mobility, due to deregulation of financial markets.

• A notable trend towards the homogenization of development models, but one in which the persistence of restrictions on the movement of labour is also perceptible.

Figure 2.2.1. Timeline of globalization in the period 1864-2008

Source: compiled by the authors.

1864InternationalWorkersAssociation

1869Opening of theSuez Canal

1870Unificationof Italy

1871Unification ofGermany

1884BerlinConference:colonisationof Africa

1904Opening of theTrans-SiberianRailway

1906First radiobroadcast

1914Opening of theCanal of Panamá.

1914First WorldWar

1915Firsttransatlantictelephonecall

1917RussianRevolution

1920Foundationof theLeague ofNations

1929US StockMarketCrash

1989Fall of theBerlin Wall

20019/11 TerroristAttacks in US

1944Creation ofthe WorldBank

1945Creation of UNOand IMF

1948Signing ofGATT

1967EuropeanEconomicCommunity

1960Creation ofOPEC

1969Creation ofARPANET(precursor ofthe Internet)

1973Oil crisis

1973Creation ofthe Internetprotocol (IP)

1979Second oilcrisis

1981IBM createsthe firstpersonalcomputer

1993Treaty of theEuropeanUnion (15countries)

1995Creationof WTO

2001ChinaentersWTO

2004Enlargementof theEuropeanUnion(25 countries)

2006The Internetreaches 100millionusersthroughoutthe world

2007Extension ofthe EuropeanUnion

1939SecondWorld War.Creation ofNATO

2008World financialcrisis:governmentintervention

1st STAGE 2nd STAGE RECENT GLOBALIZATION

NO

TAB

LE E

VEN

TS F

OR

GLO

BA

LIS

ATIO

NP

OLI

TIC

AL,

SO

CIA

L A

ND

EC

ON

OM

IC E

VEN

TS


35

2.2.2. DIMENSIONS OF GLOBALIZATION

Far from being a one-dimensional phenomenon, globalization presents various different facets, to the extent that its effects are felt in different areas of countries’ lives. It has economic, technological, political and social dimensions, which, together with the factors that define each of these, show the breadth of the impact of globalization.

2.2.2.1. Economic dimension.

At the economic level, globalization has had important effects on value systems in most productive sectors, as well as on trade in goods and services. There is a close relationship between the upsurge of integrated production systems, the expansion of trade channels and foreign direct investment, and the increasingly prominent role of transnational companies, which have become leading players in international trade.

Indeed, although world organizations such as the WTO or the IMF have made it possible to establish the necessary regulatory framework for globalization, it is transnational companies that have brought the process to fruition. In most productive sectors, companies’ value chains have been internationalized. The search for lower production costs, together with technological facilities allowing management in real time and connection to any part of the world, have led to a geographical relocation of business processes, not confined to aspects of production but also affecting design, research, customer service and administrative processes. In practice, three variants of these strategies can be distinguished: adaptation to local markets, aggregation to achieve economies of scale, and arbitrage or separation of company processes in different parts of the world. All this has constituted the real driving force behind the world expansion in trade, involving a growth in the number of companies with an international presence (in 2007 UNCTAD estimated the number of transnational companies to be over 78,000, with approximately 780,000 subsidiaries in foreign countries).

There are factors that have made possible the worldwide expansion of companies that characterise the economic dimension of current globalization. Prominent among these is liberalization of trade, of financial flows and of investments in developing countries, which have accelerated in the last two decades.

DIMENSIONS OF GLOBALIZATION

ECONOMICLiberalization of tradeFinancial flowsInvestments in developing countries

TECHNOLOGICAL

POLITICAL

SOCIAL


36

Liberalization of trade:

In general, there has been a weakening of protectionist policies which has favoured the rapid growth of exports. Even so, it must be pointed out that this international openness has arisen in a framework of very varied strategies of trade policy between different countries. Economic growth has been accompanied by mechanisms of state intervention in foreign trade, the financial sector and technology. A notable example is the high level of participation by Asian countries in the development of the commercial world, largely at the expense of the relative weight of trade between developed countries, which nevertheless continues to represent over half of world trade. Trade between developing countries also shows a constant increase of Latin America and the Caribbean and, to a greater extent, in the Asian bloc. On the other hand, growth in Africa and the rest of the world has hardly altered. All this has contributed to the establishment of major international shipping lanes for transporting goods.

Source: WTO

Figure 2.2.2. Volume of world trade in goods and Gross Domestic Product (GDP), 2000-2006 (%)


37

Source: WTO.

Figure 2.2.3. Volume of world trade in goods by major product groups, 1950-2006.

Table 2.2.1. Gross Domestic Product (GDP), 2000-2006 (%)

North AmericaUnited States

Central and South America *

EuropeEuropean Union (25)

Community of IndependentStates (CIS)

Africa and the Middle East

AsiaChinaJapan **India

Whole world

GDP2004

3.93.9

6.9

2.42.3

8.0

6.0

4.810.1

2.78.0

3.9

2005

3.23.2

5.2

1.81.6

6.7

5.5

4.19.91.98.5

3.2* Includes the Caribbean region.** Data on volume of trade based on statistics and an index of adjusted prices of electronic articles.

2006

3.43.4

5.2

2.82.6

7.5

5.4

4.410.7

2.28.3

3.7

EXPORTATIONS2004

8.08.5

13.0

7.07.0

12.0

8.0

15.524.013.515.5

10.0

2005

6.08.0

8.0

4.04.0

3.5

5.0

11.525.0

5.020.5

6.5

2006

8.510.5

2.0

7.57.5

3.0

1.0

13.522.010.011.5

8.0

IMPORTATIONS2004

10.511.0

18.5

7.06.5

16.0

14.0

14.521.5

6.516.0

...

2005

6.56.0

14.0

4.03.5

18.0

13.0

8.011.5

2.020.5

...

2006

6.55.5

10.5

7.06.5

20.0

8.5

8.516.5

2.012.0

...


38

Financial flows:

Financial globalization has occurred at a higher speed than of trade and production, driven by liberalization of international economic transactions.

Investments in developing countries:

The boom of Foreign Direct Investment (FDI) is a key feature of recent economic globalization. The regulatory changes necessary to facilitate international investment have taken place, whilst administrative systems derived from the technological revolution have contributed to this development. Developed economies are still the principal point of origin and destination of FDI, although such flows have increased considerably in developing countries. The main emerging countries that receive foreign direct investment are China, India, Mexico, Brazil and Argentina.

Figure 2.2.4. Net flow of capital to emerging countries as a percentage of GDP, 1990-2006.

Source: compiled by the authors from UNCTAD data.

Figure 2.2.5. Evolution of outgoing flows of FDI in developed and developing economies in the period 2001-2006, in billions of USD.

Source: compiled by the authors from UNCTAD data.


39

2.2.2.2. Technological dimension.

The twenty-first century began in the throes of a genuine technological revolution, not only in terms of the development of communications but also reduction of costs facilitates technology to spread among companies and homes. The lowering of the cost of access to information must be analysed in combination with the way transport has evolved, reducing distances worldwide through the possibility of transmitting information in real time.

Technological progress has contributed decisively to improved productivity, economic growth and world trade, and has brought to a climax a process initiated in the 1970s, when international outsourcing of the most labour-intensive processes became widespread among the largest companies. All this has led to greater profitability of production, commercial and research processes managed on a worldwide scale.

Source: EITO and AMECO.

Figure 2.2.6. Expenditure on information technologies as a perception of GDP, 2005.

Figure 2.2.7. Expansion in world exports of information technology products and other manufactured goods, 1996-2005.

Source: WTO.


40

2.2.2.3. Political dimension.

The political aspects of globalization must also be regarded as an essential part of the modern world, whether for the key role they have played in establishing the framework that has made the advance of globalization possible, or because of the implications of the world at large for national policy. International political organizations have evolved enormously in the second half of the twentieth century and they are of growing importance in the international order, especially since the fall of the Communist bloc.

International organizations (like UNO, principally) contribute to the establishment of global policy in questions of worldwide significance such as conflicts between countries or managing international crises. Apart from certain differences in particular areas, it is political action on an international level that shapes the current world order in which globalization develops:

• The consolidation of US hegemony.• The process of European integration, which is gaining

importance in the world economy and international politics.

• The stagnation of Japan.• The appearance of China and India as emerging powers.• Uncertainty over the evolution of Russia as a world power.• The critical importance of Arab countries and of the

regional situation in the international context.

One consequence of political globalization is a loss of national sovereignty on some issues, to the extent that decisions of worldwide impact are filtered through or directly managed by international organizations. In particular, international organizations strive to spread the belief that democratic systems must prevail. Separation of powers, plurality and alternation in government constitute the basis for legitimising national politics vis-à-vis other countries. In spite of this, establishing democracy in the world is a process not without difficulties and periodic crises in particular cases.

2.2.2.4. Social dimension.

Globalization also affects countries’ social and cultural systems. The cultures of the world have been brought closer to each other, the main result being cultural miscegenation. Advanced societies accept their multiculturality, which is reflected in the fact that different religions and races live next to each other.

Nevertheless, globalization entails constant difficulties over the regulation of migratory flows between countries, especially those towards advanced countries. There are flows of immigration that take place illegally and involve the arrival of unqualified workers in destination countries, whereas well-qualified human resources tend to be regularised more speedily. The drama of immigration is closely related to a country’s means, a point which gradually permeates the social conscience, and this has contributed in recent years to the development of social responsibility policies on the part of companies.

Another fundamental aspect is the existence of global environmental problems. Ecological concerns have also been incorporated into business management and pressures are increasing over issues such as the depletion of the ozone layer or global warming caused by human activity.


41

2.2.3. A DIVIDED WORLD:HIGH AND LOW PRODUCTION COSTS.

One obvious consequence of globalization is the division that has been established in the world between economically developed countries and emerging or underdeveloped countries. Thus the globalization of economies has made it possible to draw a dividing line between countries, differentiating between economies with high production costs and those with low production costs. This division is based on macroeconomic variables such as GDP, per capita income, educational level, salary levels and level of welfare provision. The differentiation is also applied in the cultural sphere, with high cost countries being located in regions with a predominantly “westernised” lifestyle, influenced by American and European culture, whilst low cost countries are more varied culturally.

A country’s GDP is an indicator that provides a first approximation to the division between countries, as it enables us to identify the principal economies of the world. Even so, from this initial classification we can see that there are emerging countries (see China or Brazil) with a high national GDP. This is why it is necessary to examine other indicators, such as labour, infrastructure or administrative costs, in order to reach a better understanding of the division between developed and emerging economies.

Table 2.2.2. Comparison of costs between the United States and China.

Source: Presentation of Dan Masters at the Lake Status Lumber Association (LSLA) “Global Competition” Conference, Wausau, Wisconsin,

February 24, 2004.


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Figure 2.2.8. Classification of countries by GDP (nominal), 2005.

Figure 2.2.9. Division of the world into countries with high and low production costs.

Source: IMF.

Source: IMF.


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2.2.4. ANTICIPATED EVOLUTION.

Despite the obvious impetus it gives to international trade and investments between countries, what really marks out the current phase of globalization is its potential impact on intangible transactions (information and knowledge flows). International intangible exchanges play a fundamental role in international trade, given that a large proportion of commercial and personal services involve a transfer of technology, information and knowledge.

In the next few years the current trend towards market deregulation, inspired by liberalization and opening-up of new sectors to international competition, can be expected to continue. Judging by the experience of previous years, the globalization process will face a series of challenges which will mark how the world evolves in the next few years and whose possible outcomes have been included in the various sectorial scenarios analysed by CEFFOR®.

In terms of production, we can expect a certain convergence between production costs in emerging countries and those in advanced countries. Labour costs, administrative conditions and infrastructure costs will tend to reach equal levels, although the differential will continue for some years, given the vast differences that currently exist between the two groups of countries. The internationalisation of the economy will continue to stimulate the quest for productive efficiency and the optimisation of business processes, forcing companies to upsize in order to reach a scale that enables them to operate in the international sphere. By the same token, many industrial sectors will relocate, as is already happening, to lower cost countries, mainly China and Southeast Asian countries. At the same time, advanced economies will become more markedly tertiarised, which will lead them to explore innovative forms of value creation in greater depth.

Undoubtedly the response to environmental problems will also constitute a factor to be taken into account in the next few decades. The trend is growing, despite the reticence of some countries, and globalization will entail an increasing use of environmentally non-aggressive techniques and greater care in the management of resources. In particular, energy sectors will enter a phase of change, with a proliferation of renewable energies and more efficient and less polluting systems, which will affect freight and passenger transport, health, disease prevention, etc.

All in all, the success of the globalization phase must depend on involving the greatest possible number of agents and countries in the benefits of the globalised world, and this is one of the most important challenges facing us in the next few years, especially in terms of basic necessities of life (food, water, shelter and security) in certain regions of the world such as Sub-Saharan Africa.

All these challenges are reflected in an increasing concern for sustainability, taking the term on three levels: economic, social and environmental. As globalization advances, new challenges appear, and the success of the globalization process depends on the ability of international players (companies, world organizations, governments, etc.) to implement suitable responses to each problem.


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2.3. Globalization IN THE FURNITURE INDUSTRY.

One of the most significant characteristics of globalization is its ability to permeate every productive sector, without exception. The outlook described above presents the main features from a macro perspective, without taking account of the particularities of each industry. It should be emphasised that although the effects of globalization are usually beneficial in general terms (and it tends to involve redistribution of wealth and growth in developing countries), in the context of the furniture industry the effects are not always positive in the short term and affect the sustainability of the industry in advanced countries. In case of furniture sector, globalization is having a substantial effect, promoting profound changes in the structure of companies’ relationships and business models. The following section describes the current situation of the furniture industry from a worldwide perspective and reviews the main effects that globalization has had on production and international trade.

2.3.1. WORLDWIDE RELOCATIONOF FURNITURE PRODUCTION CENTRES:THE FUTURE HEGEMONY OF CHINA

Overall, taking into account the main producing countries, world furniture production has shown an upwards trend in the last few years, although the latest available data are from to 2006. It seems like that the world crisis which began to be felt from the third quarter of 2007 may have caused a change in this trend in the last two years. The most useful exercise from the point of view of gauging the effects of globalization is to observe the volume of furniture production in different geographical blocs since the beginning of the twenty-first century.

Specifically, in 2006, world production of furniture totalled 259,503 million euros, completing a rate of growth of 42.91% over three years (in the period 2004-2006). By contrast, in countries with high production costs the growth rate was practically half this figure, at 21.30%, while in emerging countries the percentage was 113.52%. It can therefore be said that the relative weight of emerging countries in relation to total world furniture production is increasing exponentially. As further evidence to confirm this conclusion, it is noteworthy that the importance of these countries within the global industry as a whole went from 23% to 35% in the period 2004-2006.

Figure 2.3.2. Distribution of world furniture production in percentage between developed and emerging countries.

Source: Eurostat, World Bank.

Figure 2.3.1. World furniture production,2004-2006. (Million €)


The future hegemony of China


45

On the other hand, it should be pointed out that in spite of this trend, the European Union continues to be the world’s main driving force in furniture production, with the 36% of world output in 2006. The share of the total furniture produced corresponding to countries in the NAFTA zone (Canada, United States and Mexico) stood at 25.9%, and the Asian continent, as already mentioned, has become a mainstay of furniture production, contributing the 31% to the world total.

The remaining production volume is distributed over regions of less importance in the world context in percentage terms: Latin America, driven mainly by Brazilian production, countries of Eastern Europe, Oceania and Africa, there combined output summed up to 6.4% of the total world production.

By country, the United States was the leading furniture producer in 2006 with € 55,902 million, 21.5% of worldwide production. China, on the other hand, has grown to 17.4% of the world total. Italy, in third place, emerged as the leading European producer, eminently geared towards exports, with 8% of global production. Germany, in turn, represented 6.6% of the world total, with production in excess of € 17,000 million.

The four countries mentioned provide for over half of the global furniture production in 2006: 53.8%, to be exact. If we increase the number of major producing countries to twenty, then the percentage rises to 83.3%. It should be noted that out of these top twenty countries production is distributed among eleven European countries, four American, four Asian and one from Oceania. Spain occupied seventh place of the table of global furniture production in 2006, with a total volume of 8,642 million euros. Canada is situated at the eighth place with very similar figures ( € 8,535 million).

Figure 2.3.3. Value of furniture production by world regions in 2006. (in millions of €)

Figure 2.3.4. Value of furniture production by countries, 2006. (in millions of €)




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2.3.2. THE TRADE DEFICIT IN FURNITURE AMONG COUNTRIES WITH HIGH PRODUCTION COSTS.

Having described world furniture production and characterised the production centres in this industry, one of the indicators that illustrates the state of the globalization process in the furniture sector is international trade flows in this type of product. In this connection, the volume of international furniture trade — in other words, the value of exports and imports — amounted to 136,725 million euros in 2006, according to the most recent available figure, reflecting a rise of 10.92% compared to 2005 and confirming the tremendous dynamism of the last few years.

On the other hand, if we measure the degree of openness to outside markets through the coverage rate (exports over imports), the European Union achieved a figure of 110% in 2006; in other words, the EU is still a net exporter of the furniture sector. Nevertheless, it should be noted that this situation would not hold if we only took into account the 15-state European Union. The recent incorporation of Eastern countries into the EU has had the result of maintaining a positive coverage rate.

However, the Asian continent is where furniture exports have increased very vigorously in recent years, raising the coverage rate to 513%. This is making its mark on consumption and production on a worldwide scale. The low production costs in Asian countries, with China at the forefront, are giving rise to relocation of production centres towards these geographical areas, and the region has become one of the main sources of furniture imports to the rest of the world.

This phenomenon is especially important in the US and Canada. As the data show, the coverage rate scarcely reached 30% for the countries in the NAFTA zone (United States, Canada and Mexico), clearly revealing the great preponderance of imports over exports in this area, especially in the US and Canada. The famous “toll manufacturers” set up in the border region of Mexico with the US, in places like Tijuana and Ciudad Juarez, for importing products into the US, have gradually been replaced by companies located in China.

Figure 2.3.5. Value of furniture exports and imports by world regions, 2006. (in millions of €)

Source: United Nations


47

Thus if we analyse exports and imports by country, we can see that China has established itself as the leading furniture exporting country in the world, accounting for 19% of world exports of furniture. In recent years China has taken over the dominant position from Italy, which has been left with 11.9% of global exports, according to the latest available figures for 2006.

Germany, Canada and the United States complete the list of the five countries with the highest volume of furniture exports, a group which accounts for virtually 50% of world exports.

Similarly, and looking at the analysis from the point of view of furniture imports, we note that in this respect the United States heads the list, with 27.6% of total world imports

Source: United Nations.

Figure 2.3.6. Value of furniture exports and imports by leading countries, 2006. (in millions of €)

Figure 2.3.7. Growth of the international furniture trade and expected growth, 1997-2007. (billion USD)

Source: CSIL.


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in 2006. It is followed by Germany, France and Canada, although in no case do their percentages exceed 10% of global imports.

As a consequence of the opening of markets in the last ten years, the international furniture trade has grown more rapidly than production. By 2007, predicted growth of world trade in furniture stood at around 93 billion dollars, practically double the figure for 1999.

The opening-up of the furniture trade at an international level has given rise to significant changes in the traditional structures or patterns of production and purchasing of furniture between different countries. In developed countries, the main result has been the growing deficit in the trade balance of the furniture industry. With the exception of Italy, which remains a dynamic exporter, most developed

countries have seen an increase of their trade deficit in the furniture sector. Only Germany has reduced its deficit in the last few years, despite the influx of products from Eastern Europe, mainly from Poland. On the other hand, Canada shows a reduction in its traditional trade surplus, due to the replacement effect of part of its sales by imports from Asia.

By contrast, the trade balance of the main furniture-producing emerging countries uniformly presented surpluses in every case. The most notable case is China, which in just ten years has achieved a surplus of 1000%.

The striking growth of world trade in furniture during the last decade merely reflects the tremendous dynamism that has been evident in recent years on the supply side. However, the growth in supply is a response to worldwide furnishing needs, since in almost every world region furniture consumption has shown positive rates of growth in the last few years.

Source: United Nations.

Table 2.3.8. Trade balance of leading furniture producing countries, 1996 and 2005. (in millions of €)


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Table 2.4.1. 2005. Value of sales for NAICS code 337, Furniture and Related Products, in billions of USD for the 12 leading producer states.

2.4. THE IMPACT OF Globalization ON THE FURNI-TURE INDUSTRY IN COUNTRIES WITH HIGH PRO-DUCTION COSTS.

This following section explains the effects which globalization has entailed for different furniture-producing regions of the world. Specifically, the section begins by describing four case studies in the furniture industry, namely the United States, Spain, Canada and Australia. Firstly it analyses the case of the United States, a very useful one for the purposes of analysis since effects begin to be perceptible much sooner than in any other part of the world. The characteristics of American companies, subjected by their shareholders to greater pressure to achieve short-term profits, and the minimal concern for the industry on the part of state government have probably served to accelerate the processes of reconversion and relocation of companies. The other three cases, Spain, Canada and Australia, share a similar set of problems in the furniture industry, but above all, it happens that state and regional governments in these countries are concerned about the economic, social and environmental sustainability of their territories and of the conditions of their citizens and companies. Experts from these four countries set out the problems faced by the furniture industry through case studies with data and comments. Moreover, to complete the analysis information has been incorporated from other countries that play an important part in the world context of furniture industry. Finally, by way of conclusion, we have compiled a synthesis of the main effects of globalization on the furniture sector, drawing together the findings for each country.

2.4.1. THE CASE OF THE FURNITURE INDUSTRY IN THE UNITED STATESBy Albert Schuler, Research Economist, USDA Forest Service, Princeton (West Virginia, USA)

Description of the furniture sector in the US.

The manufacture of furniture and related products (including kitchen cabinets) in the US is currently concentrated in three geographical locations: the Midwest (Michigan, Indiana, Ohio and Wisconsin), the South (North Carolina, Mississippi and Virginia) and the Southwest (California, New Mexico and Texas). The American furniture industry wa born in the Northeast (New York, Pennsylvania and New England), then passed to the Midwest and finally to the South. Essentially it moved each time to a region with cheaper manufacturing costs and a plentiful supply of good-quality hardwoods. This kind of “migration of manufacturing capacity” occurs in most sectors, in North America and in other countries as well. Nowadays, the twelve leading states manufacture approximately two-thirds of the furniture and kitchen cabinets produced in the US.

Source: US Department of Commerce, Annual of Manufactures, 2005.


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Before embarking on an analysis of the sector, we are presented with a growing dichotomy in the “Furniture sector” for the purposes of the present case study. We include kitchen cabinets as part of the furniture sector, which is called “furniture and related products” (NAICS code 337) and includes kitchen cabinets along with the more traditional categories of furniture. We do so because the furniture and related products sector is suffering the major part of the negative impact of globalization. The sectors most affected are fundamentally consumers of wood, which includes kitchen cabinets, wooden home furniture, wooden office furniture and upholstered furniture1.

The furniture sector (excluding the kitchen cabinet sector) lost 108,000 jobs, equivalent to 21% of its workforce, in just eight years between 1997 and 2005. Only two sectors within the US furniture industry, kitchen cabinets and office furniture, have shown growth in terms of number of employees, salaries and sales value. This contrasts with the household and institutional furniture sectors, which experienced only slight growth and a major decline respectively during the same period. For example, between

1997 and 2005 sales value for kitchen cabinets more than doubled (an increase of 111%), sales of office equipment increased by nearly 50%, sales of upholstered furniture grew by a modest 27%; sales of institutional furniture increased by a mere 9%, while sales of non-upholstered furniture (for example office furniture) actually fell by 7%.

The reason for this disparity is that competition from cheap imports has had an impact on the household furniture sector, particularly on wood household furniture, which has been the worst affected. In the wood household furniture sector employment has fallen by 24% and salaries by 4%, despite the fact that demand actually grew by 27% in the US.

In essence, wood furniture imported from Canada and other countries, particularly China, captured most of the growth in the wood furniture market during the last 7 years. Demand continued to be driven largely by the phenomenal growth in residential construction during this period, but unfortunately domestic manufacturers did not share the “good times”.

Table 2.4.2. US statistics for the furniture and related products sector (NAICS 337) for 2005 and 1997.

1 The Furniture and Related Products sector, as NAICS code 337 illustrates, includes kitchen cabinets, household furniture, including upholstered and non-upholstered, office furniture and other smaller categories, including sofa beds, mattresses o TV and radio cabinets.

Source: US Census Bureau, ASM, Statistics of Industry Groups and sectors(www.census.gov/mcd/asm-as1.html).

337-Furnitureand Related

NAICSSUBSECTORCODE

NAICSINDUSTRYGROUPING CODE

NAICSINDUSTRYCODE (US)

EMPLOYEES

2005 1997 2005 1997 2005 1997(billion USD) (billion USD)

WAGES VALUE OFSHIPMENTS

535.84

99.27

17.49 14.99 84.29 64.30

33711-Kitchen Cabinets 139.43 4.45 2.32 19.02 9.03

603.67

289.5033712-Home andInstitutional Furniture

215.18 6.28 6.45 29.53 27.38

337121-Upholstered 82.27 2.36 2.01 10.53 8.2389.00

337122-Non-upholstered 80.88 2.16 2.67 10.53 11.32127.20

337127-Institutional Wooden 31.32 1.12 1.07 4.98 4.5540.00

33721-Office Furniture 137.50 5.32 5.17 26.32 21.52122.00

33791 y 33792-Other Furniture 43.73 1.44 1.05 9.42 6.3792.90

Furniture excludingKitchen Cabinets 396.41 13.04 12.67 65.27 55.27504.40

(thousand people)


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The furniture trade in the US.

The furniture trade has taken an unfavourable turn for American manufacturers, the kitchen cabinets industry that is a so far unaffected group, being the most recent to have experienced the beginnings of a decline in growth. Between 1992 and 2005 imports of all furniture products (including household, institutional and office furniture, but excluding kitchen cabinets) increased from 4,100 million dollars to 23,650 million dollars in 2005, a rise of nearly 20 billion dollars, or 477%. During this period, imports from China grew from 208 million dollars to 10,800 million, which amounts to a fivefold increase of 13 years.

The import market share for selected furniture markets and kitchen cabinets is shown in the attached illustration. Imports now account for 28% of total furniture consumption, a rise of 9% compared to 13 years ago. In sectors where wood is the principal raw material, loss of market share is of the same size or in some cases, even bigger. The 55% of wood household furniture, 11% of kitchen cabinets, 19% of the upholstered market and 21% of the wood office furniture consumed in the US in 2005 were imported.

Given that the wood household furniture sector has been the one most devastated by imports, the main sources are shown in the graphs. China is the most important: Chinese imports have grown by 525% since 1998, which represents a more than sixfold increase only 8 years.

One important reason for this rapid increase is that the Taiwanese furniture industry, with its management experience, capital and knowledge of the American market and other relevant specialist areas, relocated to the Chinese mainland in the early 1990s. Taiwan used to be an important manufacturer and exporter of wood furniture to the US. However, as its living standard has gradually increased, and its furniture manufacturing costs, particularly the labour component, have also risen significantly, it is no longer as competitive as it was once. So a “migration of manufacturing capacity” is taking place in East and Southeast Asia, from Taiwan (and to some extent mainland China) to Vietnam. Exports of wood furniture to the US from Vietnam have gone up from a million dollars to 75 million in just 5 years. In fact Vietnam is now the third largest exporter of wood household furniture to the US, after China and Canada, and it will probably overtake Canada within five years.

Source: US Department of Commerce, Census Bureau, International Trade Administration, Washington, DC.

Figure 2.4.1. Furniture trade: import market share forthe key furniture markets.


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Household furniture is not the only wood products sector that is having problems facing up to globalization and imports. Nearly 11% of wood kitchen cabinets consumed in the US are imported, and there is a growing fear that kitchen cabinets will be the next “furniture sector” to be deluged with imports.

For most of the last decade, the household kitchen cabinet sector has managed to remain competitive in global terms, maintaining its domestic market share at around 95%. This could be attributed to the fact that the cabinet sector was more vigilant and proactive towards the threat of imports. It was probably the first “furniture sector” to adopt outsourcing (subcontracting) as a viable business model. During the last two decades they have switched to using standardised components, most often produced by another company, in their manufacturing strategy, and have essentially turned into “cabinet assemblers”. The traditional furniture manufacturing model is of a kind where the company “does everything — buys the raw timber and manufactures the sawn wood, and other components necessary for producing the final product”, then assembles these components into the finished furniture product. When the cabinet sector adopted the outsourcing model, it made possible to

manufacture customised cabinets at competitive prices. The customised cabinet products distinguished them from the cheaper standard cabinets manufactured abroad. The key here is customer service: the results of market analysis have shown that customers wanted personalized cabinets, for which they were prepared to pay a bit more, but the price still had to be “competitive” compared to standard cabinets. Outsourcing enabled them to customise and still continue to offer the customer good value for money.

Figure 2.4.2. Sources of imports for wood household furniture to US.



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The proportion of consumption provided by domestic sources is falling in most wood products sectors, including pulp and paper, structural panels (plywood and OSB), hardwoods, wooden flooring and moulded products. The common denominator of most of these sectors is that they focus excessively on production and do not pay sufficient attention to the customer; that is to say, to a consumer goods mentality. This is not a good strategy unless you are a “low cost manufacturer” or have some other competitive advantage which serves to balance the scales in companies with a higher cost structure. Examples include superior service, customisation at competitive prices, rapid delivery, expert marketing and knowledge of key customers and superior quality.

Conclusion

The furniture industry in the US is going through problems, as globalization and forces related to it have exposed some sectors to fierce competition. The wooden home furnishing sector has been even more vulnerable, given that imports from Asia, more recently from China and nowadays from Vietnam, have compounded the pressure of those from more traditional sources such as Canada and/or Europe. Imports have now captured approximately 60% of the wooden home furniture market household furniture market. These problems are spreading to wooden office furniture, upholstered furniture and kitchen cabinets.


Figure 2.4.3. Share of domestic markets supplied from domestic production is falling for most wood products.


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2.4.2. THE CASE OF THE FURNITURE INDUSTRY IN Spain.By AIDIMA, Spain.

This section presents a case study on the furniture industry in Spain, through a series of indicators which describe the situation of the furniture sector in recent years and the problems involved. In setting out the case it addresses the scope of the effects of globalization on the industry.

Structure of furniture production in Spain.

The evolution of furniture production in Spain is characterised by stagnation in the last few years, with no recovery since the temporary crisis in 2001. The years of vigorous growth of furniture production in the late 1990s, when growth rates reached double figures, have already passed.

Although Spanish furniture production in 2007 was estimated to be 8,606 million euros (equivalent to approximately 0.88% of national GDP), the most recent data available from 2007 showed negative growth rates in real terms, which has provided evidence of structural problems of the industry to be added to the actual situation of the global economic crisis.

Figure 2.4.4. Evolution of furniture production in Spain (in billions of €). Growth rate in nominal terms for the period 1994-2007

Source: Spanish Furniture Market Observatory, AIDIMA.


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T

On the other hand, regarding the company size, companies of Spanish furniture sector are typically small. Although there were 12,674 companies with salaried employees in the Spanish furniture sector in 2006, according to data from the National Institute of Statistics (INE), it is estimated that almost 90% of the companies of the Spanish industry were enterprises of small and medium size SMEs (PYMES in Spanish) of less than 20 employees. Only about the 10% of the companies have employed more than 20 persons in 2005.

For several years the total number of companies in the furniture sector has been progressively falling. Thus 12,674 companies were recorded in 2006, according to INE data, and the number has been observed to have been gradually declining since the financial year of 2004.

Besides the fragmentation of the industry, characterised by a large number of companies, the centralization degree of the furniture industry is very high. Companies with more than 20 workers accounted for the 12% of all companies with a turnover of 73% of the total production of the sector in 2006.

Source: compiled by AIDIMA from INE (National Institute of Statistics) data.

Figure 2.4.6. Evolution of the number of furniture manufacturing companies in Spain for the period 2002-2006.


Table 2.4.3. Structure of the furniture manufacturing sector for the period 2003-2006.


Figure 2.4.5. Size of furniture manufacturing companies in Spain by number of workers in 2006.


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T

The international furniture trade.

Due to the furniture trade balance it can be confirmed that the evolution on the Spanish furniture industry in terms of international trade has changed sustantially in the last 15 years. Direct, sporadic exports as a way of gaining a foothold in international markets is a thing has already past. For years, exports have been considered as an alternative solution to shor-term declines of furniture demand in the Spanish market for several years. This way at the moment the national economic situation has improved again, Spanish furniture manufacturers abandoned the international markets, and their products entered into the domestic market again. Therefore there was no continuous presence at the international markets and exporting was considered to be a sporadic activity.

This behaviour has changed, at least in a qualitative sense, in the last few years, as both leading suppliers of raw materials for furniture and furniture manufacturers themselves have progressively taken their place on the international markets and have thus been permanently competing for a share of the market there. The weakness of internal demand in the destination markets for Spanish furniture (mainly France and Germany) has encouraged domestic manufacturers to adopt a strategy of reinforcing access to those markets.

The most usually way of internationalizing of companies of this sector has been to make distribution agreements to ensure a continuous presence at external markets, although they started to establish their own factories or carrying out joint ventures with local companies in their destination markets. The European Union, the main international market for Spanish furniture, has provided a frame of commercial stability that is fundamental for Spanish companies, even more after adopting the Euro as a single currency in the countries that are the principal export market of Spanish furniture. However, the current European frames oblige Spanish manufacturers to secure and maintain competitive advantages in European markets, especially bearing in mind the incorporation of new member countries into the European Union.

This context of stability and progressive internationalisation has helped to create opportunities, that could be exploited by lots pf furniture manufacturers by improving their organizational structures and their management, thereby progressively professionalising an industry whose origins, in many cases, lie in family businesses. However, some companies have tried to take advantage of these opportunities without having a well-designed international business strategy, which has led them to take serious risks.

Source: ICEX (Spanish External Trade Institute), compiled by AIDIMA

Figure 2.4.7. Evolution of furniture exports: volume in millions of € and annual variation rate for the period 2001-2007.


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On the other hand, it should be emphasised that the furniture manufacturers most affected by the evolution of the international situation and of the demand in external markets are the most opened ones to international markets, and these are mainly companies devoted to manufacturing rattan furniture, classic furniture and avant-garde furniture. At the other end of the scale there are subsectors of Spanish furniture production with a limited presence at external markets (for example kitchen furniture, which focuses its exports on a small number of countries such as Portugal, France, the United States...).

Exports2

The Spanish furniture exports in the last few years have shown a period of decrease has started in the business year of 2002. However, this trend may have changed during the last year, having shown a growth close to 16% and a nominal value of over 1.626 billion. This highlights the fact that among unfavourable circumstances, such as the current domestic situation, Spanish manufacturers are making efforts once again to enter into external markets. Regarding the destinations of furniture exports, it can be seen that the main market is the European Union, with a 72.05% of the total.

2 For the analysis of external trade (exports and imports) in Spanish furniture the following schedules have been used:Product classification: TARIC harmonised tariff (ICEX: External Trade Institute). Generic schedule TARIC 94: 94.01 “Seats and seat parts”; 94.03 “Furniture and furniture parts”.These two schedules encompass the main products of the furniture-producing subsectors considered in this report.

Source: ICEX, compiled by AIDIMA.

Table 2.4.4. Volume of furniture exports from Spain by world geographical regions and as a percentage of the total (in millions of €) for the period 2005-2007.

WORLDREGIONS

% OFTOTAL2007

2005 2006 2007

1,174.31,061.5

19.455.937.4

51.325.2

2.55.50.9

17.2

128.060.120.039.0

8.8

75.47.5

32.11.71.4

21.810.9

5.8

1,434.9

1,113.91,037.3

18.952.740.6

73.633.1

3.15.00.3

33.0

127.357.713.636.113.7

83.19.4

37.62.93.0

21.010.6

5.3

1,403.3

1,302.41,164.0

22.666.549.2

90.350.7

5.17.21.8

25.6

134.751.121.148.014.5

82.67.3

38.03.72.4

22.48.8

5.6

1,615.5

80.62%72.05%

1.40%4.12%3.05%

5.59%3.14%0.31%0.44%0.11%1.58%

8.34%3.16%1.30%2.97%0.90%

5.11%0.45%2.35%0.23%0.15%1.39%0.54%

0.35%

100%

EUROPEEuropean UnionEFTA (since 1995)Eastern EuropeRest of Europe

AFRICANorth AfricaCentral AfricaWest AfricaEast AfricaSouthern Africa

AMERICANorth AmericaWest IndiesCentral AmericaSouth America

ASIAMiddle EastArabian PeninsulaCentral AsiaSouth AsiaFar EastSoutheast Asia

OCEANIA

TOTAL

The exportation of Spanish furniture.


58

As for diversification, it should be pointed out that the 15 leading destination countries of national furniture exports accounted for nearly 81.40% during 2007, the top five of them are members of the European Union, among them, France is the principal destination country, accounting for 30.33% of total external sales.

Portugal was the second largest destination market for national exports, with a percentage of total foreign sales of 12.31%, in spite of a decrease of 1.20% compared with the results of the financial year of to 2006. The United Kingdom, Italy and Germany make up the rest of the leading destination countries for national exports in the European Union.

The United States, the main destination country for national exports at the American continent, has seen a gradual reduction of its share of Spanish furniture sales over the last few years. During the financial year of 2007 exports to the United States fell by 11.20%, leaving its share standing at 2.95% of total foreign sales.

Therefore we can conclude that the pattern of furniture exports of Spanish companies is of a concentric nature, to neighbouring countries of common legislation.

Table 2.4.5. Leading destination countries of Spanish furniture exports, 2002-2007. (in millions of €)


COUNTRIES 20052002 2003 2004

354.20

210.21

81.64

64.54

100.98

45.32

63.47

37.40

28.26

31.19

12.01

16.26

0.85

16.87

12.66

423.55

1,499.41

EVOLUTION07/06 (%)

2006 2007 2007(%)

407.83

215.63

102.06

74.04

90.96

47.41

62.80

39.83

26.87

34.94

11.42

19.08

11.86

15.80

15.00

267.21

1,422.74

432.45

206.26

95.24

74.50

73.84

42.25

63.84

40.41

26.08

36.99

20.32

16.67

1.26

18.04

14.72

242.62

1,408.49

426.43

211.80

92.62

78.41

70.11

46.25

50.779

43.05

33.92

32.96

15.64

20.97

15.62

21.59

15.34

259.35

1,434.85

364.43

200.85

87.99

85.97

69.55

46.81

53.73

38.43

31.19

35.51

20.96

21.79

29.96

19.23

15.78

280.59

1,402.77

490.08

198.81

109.33

92.02

72.87

60.64

47.71

45.54

41.23

39.01

37.31

22.83

21.55

20.05

16.16

280.59

1,615.56

30.33

12.31

6.77

5.70

4.51

3.75

2.95

2.82

2.55

2.41

2.31

1.41

1.33

1.24

1.00

0

100

34.48

-1.02

24.25

7.04

4.77

29.54

-11.20

18.50

32.19

9.86

78.01

4.77

-28.07

4.26

2.41

5.30

15.71

FRANCEPORTUGALUKITALYGERMANYRUSSIAUSANETHERLANDSMEXICOBELGIUMMOROCCOANDORRASOUTH AFRICAGREECEIRELANDRest of WorldTOTAL


59


Figure 2.4.8. Leading destination countries of Spanish furniture exports by volume, 2007 (in millions of €).


60

Imports

On the other hand the evolution of Spanish furniture imports, has maintained a continuous growth since 1993, with rates of increase fluctuating within a range of 4% and 33%. During the period of 1998-1999, annual import growth reached 33.8%, as a result of vigorous domestic demand and favourable circumstances for business activities in Spain (falling interest rates, increasing consumption, access to home ownership among the generation of the baby boom...). Subsequently, in line with the slowdown of economic activities, the level of increase of furniture imports fell in 2001 and 2002.

Although there was a deceleration of the rate of furniture imports to Spain during the financial years 2003-2006, it has not come to a stop, and the increase expressed in percentages in the final year was very high: 35.5% compared to the level reached during 2006. The nominal value of imports stood at € 2,806 million.

The big question is to analyse the sources of imports in order to understand how national manufacturing has become less competitive. In this context the main geographical region of origin of the imported furniture to Spain is the European continent, with 65.27% of the total, and 96% of the European imports are from the EU.

Figure 2.4.9. Evolution of furniture imports for the period 2001-2007 (in millions of €)



Table 2.4.6. Volume of furniture imports to Spain by world geographical regions and as a percentage of the total (in millions of Euros) for the period of 2005-2007


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Italy and Germany have strengthened their position as the main European furniture importing sources to Spain. Italy, with an increase of 22.87% over 2006, accounted for 14.2% of the total national imports. Germany, in spite of having increased its furniture imports into Spain by 43.43%, had a percentage share of total Spanish imports that stood at 14.2%.

It is important to highlight the increase of imports from Eastern European countries. Imports from countries like Poland and the Czech Republic have grown by a 160.20% and 170.26% respectively compared to the financial year of 2006.

On the other hand, Asia provided the 29.8% of the total national imports during the financial year of 2007, with the Far East and Southeast Asia as the main sources of furniture imports from the Asian continent. This has been one of the key features of the globalization process when we come to assess its effects in Spain.

As for the sources of imports by countries, the 15 leading countries of furniture imports in 2007 accounted for 86% of the furniture entering Spain from third countries. In these top 15, the Asian continent, with China, Indonesia and Vietnam, contributed a bit less than 26% of the total imports, whilst 10 countries of the European continent, accounted for over 50% of the incoming furniture from abroad during 2007.

Even if the E.U. is the principal area of origin of the Spanish furniture imports, the leading source of furniture imports is China with 20.2% of the total furniture imports to Spain. During the financial year of 2007, the inflows of furniture from China increased by 33.04% compared to 2006.

The imports of Spanish furniture.

65.27%EUROPE

1.90%AFRICA

3.00%AMERICA

29.8%ASIA

0.00%OCEANIA


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Table 2.4.7. Source countries for Spanish furniture imports for the period 2002-2007 (in millions of €).



Figure 2.4.10. Leading source countries for Spanish furniture imports by volume, 2007 (in millions of €).

20052002 2003 2004

66.98

215.95

153.37

88.01

173.15

17.21

63.93

6.64

19.66

4.50

2.93

36.97

9.14

19.54

17.34

190.14

1,085.46

2006 2007 2007(%)

79.36

203.92

132.67

74.65

152.31

29.17

65.06

8.20

20.77

8.63

3.76

28.71

8.52

18.06

12.10

503.89

1,349.78

146.90

258.86

173.07

117.62

248.86

24.90

83.80

8.66

23.05

12.61

7.42

34.94

12.38

17.12

12.52

517.86

1,700.57

205.47

286.55

233.07

154.91

317.44

45.09

83.54

15.49

34.69

26.18

9.04

39.78

19.07

20.68

15.15

429.17

1,935.32

420.16

320.36

273.87

204.63

171.35

66.64

86.27

22.09

43.60

38.04

26.67

36.66

19.58

26.57

34.74

279.94

2,071.17

558.97

393.62

392.82

278.14

187.50

173.40

86.57

59.70

52.75

49.41

41.63

31.46

25.54

25.13

21.69

385.77

2,764.10

20.2

14.2

14.2

10.1

6.8

6.3

3.1

2.2

1.9

1.8

1.5

1.1

0.9

0.9

0.8

14.0

100

33.04

22.87

43.43

35.92

9.43

160.20

0.35

170.26

20.99

29.89

55.09

-14.18

30.44

-5.42

-37.56

37.80

33.46

CHINAITALYGERMANYPORTUGALFRANCEPOLANDINDONESIACZECHREPUBLICVIETNAMBRAZILTURKEYUKAUSTRIANETHERLANDSUSARest of World

COUNTRIES EVOLUTION07/06 (%)


63

Having analysed furniture exports and imports separately, we can carry out a combined analysis of both. For this purpose, the coverage rate allows us to compare a country’s export and import volumes, offering a ratio which facilitates interpretation of the combined evolution of both aggregated together. A coverage rate of 100% in a given year means that imports and exports were equal for that period. Values over 100% imply a greater trend towards exports than imports, and vice versa.

In case of Spanish external furniture trade, the coverage rate during the last 15 years has gone through various stages:

• The coverage rate fell between 1990 and 1992. This was due to the economic crisis in Spain, which was more severe than in other countries, one of its consequences was the inflow of furniture of foreign origin to the domestic market.

• However, during the period 1993-1997 the situation was reversed: exports practically quadrupled, while imports scarcely doubled. This caused that the coverage rate has hit its highest level of the last 15 years, considering that during 1996 and 1997 the rate of Spanish external trade of furniture reached 228% and 227% respectively.

• Nevertheless, from 1998 the trend reversed once again and imports began to increase to the point of tripling in value in 2003 compared to their 1996 value. On the other hand, the growth of exports of Spanish furniture was smaller. The situation was such that from 1998 onwards the Spanish coverage rate for external trade in furniture fell from 215% in 1998 to 108% in 2003. This rate did not yet reflect a greater presence of imports, although it did foreshadow the 2004 results.


Figure 2.4.11. Evolution of the trade balance of furniture and the coverage rate for the period1996-2007 (€)


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• The coverage rate continued to fall in 2005 and 2006, standing at 74% and 68% respectively. The previously continuous rise of imports slowed down, while exports began to strengthen.

• In 2007 the coverage rate stood at 58%, mainly due to the unstoppable rise of imports, especially of Asian origin. Despite showing an excellent export trend with an increase of 15.92% compared to national exports during the financial year 2006, the onward march of imports, with an increase of 35.5%, has merely served to reduce the coverage rate and maintain the downward trend of the last few financial years.

In 2007 furniture imports exceeded exports, as had happened in the previous few years. In case the observed trend will continue, the Spanish market would become a net importer of furniture.

The Spanish pattern of furniture imports from emerging countries is clearly orientated towards non-European countries. In this context, furniture is being imported from Southeast Asian countries (Vietnam, India, and Indonesia) and from China, as well as from other countries such as Brazil. On the contrary, Spain hardly obtains any furniture from emerging countries of Eastern Europe, excepted Poland.

Finally, there are growth trends of international furniture sales in certain countries to be observed which may follow the Chinese example and become world centres of furniture production. This is the case of Eastern European countries. We also should not forget about the evolution of furniture production in Asian economies (mainly Vietnam, India and Indonesia), as well as in Brazil and Mexico.

The increase of imports from emerging countries offers scope for considering a change in the structure of production in the Spanish furniture industry.


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The role of distribution: concentration of the market structure.

Regarding to the structure of the distribution market, an ongoing process of concentration of furniture stores can be identified in Spain, whether of purchasing groups, franchises, superstores or chains, just as has happened in other European countries. For example, the three leading distribution brands of Spain (El Corte Inglés, IKEA and Merkamueble) are increasing their market share year by year. This process of concentration of distribution has not only led to scale economies of purchasing capacity, but in addition it has gone hand in hand with a process of backwards vertical integration, taking on product creation processes which have traditionally been carried out by manufacturers. In this way, the major distribution chains have not only been able to buy furniture at comparatively better prices than those offered by local/national producers, but have bought products that they have designed to their own specifications to fit to the needs of their final consumers, thereby guaranteeing a unique range of products offered at their distribution points and making possible maintaining the commercial margins that are highly attractive for their businesses.

Changes in consumer habits.

Refering to Spanish furniture consumers, a series of changes can be detected in consumer habits; giving rise to a more demanding attitude of consumers, the appearance of new consumer trends, with a greater use of new channels, drawing on a larger number of sources of information, looking for purchasing experience and lessons learned in other sectors, and occasionally involving lower average expenditure per consumer. Greater attention to consumer needs through values, mentalities and lifestyles will be one of the key factors of change.

Source: League table of furniture distribution in Spain, AIDIMA, 2006.

Figure 2.4.12. Market share of the three leading furniture distribution brands in Spain for the period 2003-2006(in millions of €).


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Falling profitability of Spanish furniture manufacturers.

One of the effects of the situation the furniture industry is going through actually is the progressive fall of the profitability of manufacturing companies, which means that it is gradually becoming a less attractive sector for capital investment. Essentially, the capital share is in possession of small family groups. These companies were originally family businesses that have incorporated successive generations as managers and shareholders, so the company’s profitability remains a secondary issue in a certain way, since there was an economic return via salary. However, as we will see below, there are no signs that company profits are reinvested into the companies themselves.

In this context, the results of the principal companies of the furniture sector show that the evolution of average economic profitability can be precisely identified as a downward trend in the last few years. Bearing in mind that the economic profitability ratio refers to the relationship between assets invested over economic profit, without taking into account the way companies are financed, the data series for the last few years point us to a reduction of the attractiveness of the Spanish furniture manufacturing business.

Lower investment of assets and a reduction of profits (as a consequence of rising costs and loss of negotiating power when dealing with suppliers and distributors) have led to an accumulated fall over a six-year period of 3.35 percentage points in gross profitability (in other words, the one that does not take into account the financing structure at profit calculating).

Moreover, if we look at the return of equity invested in companies through shares and profit retention, we are equally faced with a significant fall over a mere six years. Thus the financial profitability of the furniture industry has undergone a major decline since the year 2000, although admittedly this decline has not been constant over time. Between the accounting years 2000 and 2002 financial profitability suffered a fall of 14.18% in just three annual cycles, the last year being the one in which the figure underwent a substantial reduction of 9.83%. From 2003 onwards there was a period of slight growth, at a less intense pace than in the period of recession.

On the other hand, if we look at gross financial profitability (a ratio which does not take into account the impact of taxes on profits), we find the confirmation of important reductions, as it can be seen in the attached graph. In this connection, profit generated in relation to shareholder investment fell considerably, which makes furniture companies less attractive for owners or shareholders to invest in.

Conclusion

The evolution of production of Spanish furniture industry has been characterised in the last few years by a stagnation from which it has not recovered since the temporary crisis of 2001. Since 2004 furniture imports have exceeded exports of Spanish furniture and in 2007 they amounted to nearly 32% of total production (led by China, which accounted for 20% of the total). On the other hand, the structure of the furniture distribution market is undergoing a continuous process of consolidation, with less operators of larger size and greater capacity to undertake purchasing at a global scale. These factors, combined with the small size of companies (90% of them have less than 20 workers) and changes in consumer habits, have led to a reduction of margins and profitability of Spanish furniture manufacturing companies, and have therefore made it necessary to change their current business model.


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Source: Economic/financial ratios of leading manufacturers in the furniture industry in Spain, AIDIMA.

Economic profitability

Indicates the average return a company obtains through its investments in assets. It is a measure of profitability of assets.

Gross economic profitability

This informs us about the company’s efficiency of the use of its investments, relating this to the gross economic results. It basically involves analysing the profitability

of assets independently of how they are financed, or, in other words, without taking account of the structure of liabilities.

Figure 2.4.13. Figure 2.4.13. Economic profitability and gross economic profitability of furniture manufacturers (not including institutional and office furniture subsectors) in Spain, 2000-2006.

Figure 2.4.14. Financial profitability and gross financial profitability of furniture manufacturers (not including institutional and office furniture subsectors) in Spain, 2000-2006.

Source: Economic/financial ratios of leading manufacturers in the furniture industry in Spain, AIDIMA.

Financial profitability

This gives us information relating to the average profitability achieved by the company through its activity, on the basis of its own funds. It attempts to measure the

profitability obtained by the owners/shareholders of the company, that is to say, the rate of return on the equity they have directly invested (share capital) and of the

reserves, which are ultimately retained profits and therefore belong to the owners. The result indicates the income available to shareholders (gross financial income)

and signifies the return on the investments made by shareholders at the start of the period.

Gross financial profitability

The interpretation of this ratio is the same as for financial profitability, though it must be borne in mind that the result being considered is before tax. It measures

gross profit generated in relation to the company’s shareholder investment.


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2.4.3. THE CASE OF THE FURNITURE INDUSTRY IN CANADAby Torsten Lihra, Group Leader-Furniture, Value-Added Department-Furniture Group, FPInnovations-Forintek, Quebec (Canada).

Canada has been making residential furniture since the time of the first settlers. The abundance of wood, combined with strong domestic demand, have made this industry an ever-present feature of the manufacturing landscape in Canada. Consumption of Canadian furniture has been increasing continuously in recent years, reaching approximately 10 billion in 2005. In that year, the furniture industry, including residential furniture, office furniture, institutional furniture and kitchen furniture, generated sales of US$9 billion in volume terms. The data make it possible to examine furniture sales by the industrial sector from 1995 to 2003. Office furniture constitutes the most important furniture sector in Canada, followed by household furniture, kitchen cabinets and institutional furniture (Strategis 2007). Over 50% of production is exported, and the US accounts for 96% of the export market, making Canada the fifth largest furniture exporter in the world, after China, Germany, Italy and Poland (Strategis 2007).

Figure 2.4.15. Furniture consumption in Canada.

Source: Aktrin Furniture Information Center 2005.

Figure 2.4.16. Furniture sales by industrial sector.

Source: Strategis 2007.


69

The structure of the furniture industry in Canada is highly concentrated, and its ten largest manufacturers, less than 1% of all companies, account for 43% of all sales (according to 2001 data). The biggest manufacturer had four times the turnover of the third largest and seven times that of the tenth largest.

Geographically, the furniture sector is concentrated on the eastern axis of Canada. Ontario represents approximately 50%, Quebec 30% and the other provinces 20% of production. Market proximity drew companies close to the US border in the southern part of the provinces. The furniture industry in Ontario is centred on the production of office furniture. Almost half its volume of furniture sales is in this sector. Residential furniture is strong in Quebec, slightly exceeding Ontario’s production in that sector (Strategis 2007).

The furniture industry is inherently labour-intensive. It employs mainly unskilled and semi-skilled workers, especially immigrants. Wages are below the average for the manufacturing sector in Canada. The industry suffers from a skill shortage, particularly in production processes (CNC: Computer Numeric-Controlled machinery) and in the manufacture of high-quality upholstered furniture. There is a high degree of staff rotation in jobs requiring little training. More than 100,000 direct employees work in 3,600 manufacturing plants. Generally 85% of the employees were assigned

to production and 15% to administrative and other tasks.Despite this distribution of the work force, production workers represented only 71% of the total wage bill. The average size of companies in the manufacturing sector was 29 employees and US$11 million of annual sales volume. Sales per production worker reached US$125,000 in 2003, following a 10-year effort to improve productivity, with a realised profit margin of 40% (Industry Canada 2005).

In the residential furniture sector, operating costs increased by 137.6% between 1993 and 2002, which was lower than the 156.1% increase of sales over the same period. The cost of materials constituted the largest contribution to this increase, growing by 149.4% over the decade. Material and salary costs represented 98.6% of all operating costs incurred by the residential furniture sector, the rest going on fuel and electricity. Material and salary costs as a proportion of operating costs remained relatively constant, with materials representing 66% and wages 32.6% (Industry Canada 2005). Fuel costs were very low in all sectors, as furniture manufacturing is not in general an energy-intensive activity. Hardwood timber is the main raw material for residential furniture production. It is supplied from local sawmills in

Figure 2.4.17. Geographical concentration of the furniture sector in Canada.

Source: FPinnovations- Forientek


70

Canada and neighbouring US states.Distribution and sales of the final product are traditional: manufacturers work with a network of sales representatives. These sales representatives generally work for more than one manufacturer. The product is sold to furniture retailers, who sell it on to consumers. Manufacturers have little direct information about consumer needs and rely on feedback from retailers. Table 2.4.8 provides an overview of the main distribution channels for residential furniture in North America.

The furniture sector is generally performing well in the area of electronic commerce, although it also reports encountering high barriers to the use of e-commerce in relation to manufacturing in general, in practically all categories of barriers. The first barrier identified by this sector is the nature of the merchandise, which does not readily lend itself to Internet transactions. The second largest barrier to electronic commerce which has been identified is a preference for maintaining the current business model, while the third most frequently cited barrier was high development and maintenance costs (Industry Canada 2005).

Table 2.4.8 Sales of residential furniture by distribution channel in 2005.

Source: Furniture Today, 2006.


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Figure 2.4.18. Trade balance of Canadian household furniture.

Figure 2.4.19. Exports of household furniture to the US and evolution of the USD/CAD exchange rate.

Globalization and the Canadian furniture industry

Globalization began to have a significant direct impact on the Canadian household furniture sector when Canada signed the Canada-US Free Trade Agreement (FTA) in 1989. At that time, exports of household furniture were low (12% of total sales) and manufacturers concentrated on the domestic market. When border tariffs were removed for furniture trade between Canada and the US, local manufacturers were subjected to competition from US manufacturers. In the first period, from 1989 to 1993, nearly 30% of Canadian

household furniture producers closed their factories. The North American Free Trade Agreement (NAFTA) was signed in 1994, adding Mexico to the initial FTA. Its labour costs were significantly lower than those in the US or Canada, but contrary to all expectations Mexico’s entry into the Free Trade Agreement did not have a significant impact on the furniture sector. The development of the industry in Mexico was slower than expected. Some Canadian manufacturers tried setting up production plants in Mexico, but because of cultural differences the running of the plants proved to be a delicate problem. Most of the projects failed. Household furniture manufacturers in Canada then decided to turn


Source: Strategis 2007, Bank of Canada 2007.


72

Figure 2.4.20. Imports of household furniture from China and the US to Canada.

Figure 2.4.21. Exports of household furniture from Canada and China to the US.

the perceived threat into an opportunity. Instead of trying to protect and maintain their share of the domestic market, companies began to develop a presence in the US market. The United States constituted the largest furniture market in the world, and the market development experts employed by Canadian manufacturers were worth the expense: between 1993 and 2000 the trade balance in Canada (defined as total exports minus total imports) enjoyed seven consecutive years of growth. During the same period, exports to the US were favoured by the weakening value of the Canadian currency, which turned Canadian products into an opportunity for US retailers. Up till 2001 the impact of globalization for Canadian

furniture manufacturers was positive and was limited to new market opportunities in the US, creating wealth and growth for companies. This was to change in the next few years. In early 1990 China began to enter the North American furniture market. Information is given below on the evolution of Chinese household furniture exports to Canada and the US, the two main markets for Canadian manufacturers.


Source: International Trade Administration 2007.


73

From 1996 to 2006 China increased its household furniture exports to Canada by 1,500% and to the US by 1,230%. In the domestic market, China became the most important country of origin for household furniture in 2002, relegating the US to second place. In 2006 Chinese imports accounted for over 40% of total household furniture imports. In 2000, China replaced Canada as the leading exporter of household furniture to the US, and provided over 50% of all household furniture imports in 2006. Canada’s export rates suddenly stopped growing, and fell slightly from then on. Between 2000 and 2006 the trade balance in household furniture fell from 644 million USD to 131 million USD. Other countries such as Vietnam, Malaysia, Brazil and Poland took advantage of their low labour costs and achieved high rates of growth in the US market. Canadian manufacturers had to face growing competition from low labour cost countries in its two principal markets.

During the same period of time, a second effect of the impact of globalization was related to currency questions. The competitive advantage provided by the fall in the value of the Canadian dollar in the early 1990s turned to Canada’s disadvantage in the early 2000s. Between 2002 and 2006 the USD/CAD exchange rate increased by 37%, cutting all profit margins. In order to offset the difference in labour costs the Chinese Yuan would have to have risen by approximately 30%, but the Chinese currency was pegged to the US dollar. International pressure finally led to this fixed exchange rate link being abandoned in 2005, but it has only risen by 3% since then. The reason is rooted in the fact that the Chinese currency is still pegged and is not freely traded on the market. Its fixed exchange rate link is now with a group of currencies instead of the USD.


74

Globalization has had its impact on furniture distribution channels. The household furniture industrial sector is mainly made up of small businesses (SMEs). These companies were used to selling to consumers through independent furniture shops. In 2002 independent furniture shops accounted for roughly 50% of household furniture sales in North America. This share fell to 40% in 2005. The main reason was shops joining forces in a consortium and the power of size when it comes to offering the best prices. Independent shops and department stores are generally small and hardly likely to be able to afford to bear the costs of supporting high-volume low-price imported products from China and other countries. Unless they offer at least some low-price products, small shops find themselves limited to selling high-end furniture. Chains of specialised shops and mass marketers gradually increased in importance and market share. Small furniture manufacturers lost their traditional sales outlets and are unable to produce sufficient volume to compete with the superstores. Faced with this situation, SMEs have to find innovative solutions. The Internet spread rapidly and globalization reached consumers. Nowadays consumers have access to a volume of information that was only available to large retailers a few years ago.

Comparisons of products from all over the world, product evaluations and comments from other consumers are only a few mouse clicks away. The Internet is at the root of a shift of power away from manufacturers and towards consumers. This empowerment enables consumers to be more selective and to get their own way.

Conclusions

The foregoing paragraphs indicate that globalization has had a profound impact on furniture manufacturers in Canada and on all the agents in the value chain. For countries that have access to cheap labour, globalization offers tremendous market opportunities in furniture, which is a labour-intensive industry. For those countries that do not have the benefit of low labour costs, remaining competitive is now harder than ever.

In conclusion, we can say that the Canadian furniture sector is going through the greatest changes it has seen in the last 30 years. These profound changes in the competitive environment demand profound changes in the industry itself in order to defend its position in world markets.


75

2.4.4. THE CASE OF THE FURNITURE INDUSTRY IN AUSTRALIA.By Barbara Ozarska, Program Manager, High Value Wood Products, CRC Wood Innovations, School of Forest and Ecosystem Science, University of Melbourne (Australia)

The furniture and furnishings industry in Australia is an important sector contributing to the wealth of the Australian economy. In the accounting year 2004-2005, 3,651 companies directly employed 43,673 workers in the furniture manufacturing industry. Direct manufacturing in the furniture manufacturing sector amounts to almost 6,800 million dollars. This represents 7.3% of total employment in Australian industry, 5.2% of wages and salaries, 3.5% of manufacturing turnover and 3.8% of value added.

The structure of the furniture and furnishings industry is made up of the following fundamental furniture manufacturing sectors:

• Wooden furniture and upholstered seat manufacturing.• Sheet metal furniture.• Mattress manufacturing.• Furniture manufacturing (unspecified).• Made up textile product manufacturing.• Wooden structural component manufacturing.• Wood product manufacturing n.e.c. • Fabricated metal products. Data are provided in statistical reports on the Australian furniture industry, mainly on the fundamental furniture manufacturing sector, without the furniture and furnishings manufacturing associated sectors.

A very interesting summary of the Australian furniture sector can be found in the report “An Analysis and Outlook on the Manufacturing Sector of the Australian Furniture Industry”. The following paragraph was extracted from this document: “It must be borne in mind that the furniture industry in Australia is anything but homogeneous. The sector is made up of everything from small-scale plants almost like craft workshops, with limited resources, at one end of the scale, up to large, well-managed companies with sophisticated management resources and the advantages of large-scale production.”


76

By way of additional basic information, the combination of company sizes is distributed roughly as follows:

<10 employees = 26% of sector turnover10-49 employees = 39% of sector turnover>50 employees = 35% of sector turnover

Over the course of the most recent five-year period, the residential and commercial sectors have benefited from the strength of the economy. Both sectors have also suffered the impact of increasing imports originating from China and other Asian countries.

The essential difference between the two is that residential furniture manufacturing has proved more vulnerable than commercial furniture to the debilitating effect of imports. This is mainly due to the fact that a major part of commercial furniture production is done to specification.

Office workstations, dividing panels, shop fittings, hotel furnishings and theatre and stadium seating are examples of this. By contrast, most residential furniture is sold in furniture showrooms and shops.

Among residential furniture manufacturers, mid-range businesses (10 to 49 employees), with relatively high and inflexible labour costs, can be said to have been the worst affected by imported products, more than either of the other subsectors.

The graphs attached below summarise statistical data on the Australian furniture industry (furniture manufacturing sector) and the dynamic changes it has undergone over the period 1998-2005.

Figure 2.4.22. Distribution of employment in the furniture industry in Australia (2004-2005).

Source: Furnishing Industry Association of Australia, 2006.


77

Figure 2.4.23. Value added in the furniture industry by sector (1998-2005).Source: Furnishing Industry Association of Australia, 2006.

Figure 2.4.24. Employment in the furniture industry by sector (2004-2005).Source: Furnishing Industry Association of Australia, 2006.


78

Table 2.4.9. Average employees per furniture manufacturer (latest data)


Figure 2.4.27. Furniture turnover: percentage division by shop category.


Figure 2.4.26. Manufacturing: furniture manufacturing industry (core sectors).Source: Furnishing Industry Association of Australia, 2006.

Figure 2.4.25. Number of establishments in the furniture industry by sector (2004-2006).Source: Furnishing Industry Association of Australia, 2006.


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The Australian furniture sector receives great support from the industry association, the Furnishing Industry Association of Australia (FIAA), which operates in all the states. The FIAA has undergone a number of changes, from national to state level, but it has always been a progressive and dynamic organization in the industry, strongly supported by furniture manufacturers all over Australia.

The mission of the Furnishing Industry Association of Australia is to be the peak representative body for those involved in the furnishing and related industries and to promote the profitable growth, competitiveness, innovation and export readiness of industry participants. The Furnishing Industry Association has recognised the urgent need to address the issue of “reshaping” the Australian furniture industry. They have done this to confront the issues and succeed by establishing a new “united and vibrant” organization. They have created “Agenda 2007” to be the strategic plan.

Following on from the successful outcome of the three-year project under the Action Agenda 1999/2000, the industry has transformed itself from a secular inward looking industry

to one which is united nationally with a focus on growth. The industry now has a solid foundation to undertake the necessary steps to put in place the programs and changes required for the industry to grow in the future. The progress made means that the industry is now ready to take the next step of implementing the industry strategic plan Agenda 2007.

In the compendium of industry dynamics over the last decade, the most critical topic has been the growing number of imported products in the retail sector.

This development began to emerge in 1990, following a progressive reduction in tariffs on imported furniture, as part of Australian government policy. The tariff scale was gradually reduced from a level of 35% in the mid-1980s down to 5%, where it has remained since 1996-97. This virtual elimination of tariffs was undoubtedly an important factor in the increasing import trends. Nevertheless, it has not by any means the only cause of the current situation.

Table 2.4.10. Main Strengths Weaknesses, Opportunities & Threats in the industry (1).


80

The main cause of this situation has been the rapid growth of Asian economies, together with their long-term strategy to dominate the manufacturing sector in world industries. These economies have been very successful through the leverage (multiplier effect) of the double advantage of low labour costs and large-scale production.

Within the furnishing industry at a local level, the sector most affected in Australian companies has been household furniture manufacturing, given that Australian commercial furniture manufacturers are comparatively better isolated from external influences, due to the fact that they place greater emphasis on made-to-measure (customised) products.

Australia imports 1,700 million AUD worth of furniture. For domestically produced furniture there was an increase of 22% in imports between 1998-99 and 2004-05, with a total trade imbalance of 1,600 millions for the same period.

The giant Chinese economy has been the leading player in the changing dynamic of imports. In only 7 years, imports of furniture from China have increased 10 times to a total in excess of 600 million dollars (taxable value).

Figure 2.4.28. Imports in the furniture industry by sector (1998-2005).


Figure 2.4.29. Trade deficit of the furniture manufacturing industry.



81

Australian manufacturers are increasing concerned about the accelerating influx of large quantities of Chinese products into the Australian market, at what appear to be dumping prices (below cost). The growing competition has had the result of decreasing production volumes, which leads to a significant restriction on profits for all manufacturers, whether large or small.

China is undoubtedly having a global impact on the Australian industry, and constant concerns about non-tariff barriers and dumping mean that manufacturers are not in favour of an Australia-China free trade agreement. However, opportunities also arise for Australia to engage in China, which is now seen as the most important growing market outside Australia. These opportunities lead to increasing exports to China, making greater use of Chinese income in domestic production, selling finished Chinese products on the domestic market and setting up production plants in China. Nevertheless, these opportunities for growth are restricted by significant non-tariff barriers to trade with China, particularly lack of Intellectual Property Protection (IPP), which has been identified as an important problem.

Many manufacturers who have survived the fierce competition have become more efficient and are better placed to prosper in the long term. Those who are less able to adapt to change have already fallen by the wayside.

Globalization and the Australian furniture industry Furniture companies from Asian countries that have entered Australia have found the local market exposed to very volatile economic cycles, with many small manufacturers struggling to meet demand in peak cycles and financially exposed in troughs due to over-supply and lack of creditable market intelligence and almost total dependence on domestic supply.

Furniture manufacturing companies from Asian countries have consolidated their resources, globalised and merged markets as barriers to trade have been lowered. There has been a significant increase of copying/merging of designs and use and promotion of niche Australian timber products.


82

The current level of imports will have a dramatic and long term effect on Australian manufacturers if they continue at the same growth rate. As a consequence increasing numbers of manufacturing facilities are being rationalised or have been forced to relocate offshore. Imports will also make local manufacturing vulnerable to any major market downturn in the broader economy due to oversupply with lower demand. The Australian furniture industry obviously faces significant challenges, and domestic production and exports show a slight reduction during the last five years while imports have grown strongly. Furniture manufacturers find it very difficult to compete with low-cost manufacturers in China, Malaysia, Indonesia and Vietnam. Nevertheless, Australia has the potential to build an internationally competitive furniture industry in high-value quality furniture products.

The Australian furniture industry has several inherent advantages, including access to unique plantation and replantation of sustainably-managed Australian hardwood timbers, as well as a very well trained and technologically advanced workforce, which offers opportunities for innovative approaches to production and design. Exploiting and capitalising on these advantages is the challenge which the Australian furniture industry faces during the next decade.

Obviously only manufacturers with high levels of overall productivity, efficient supply chains, export readiness and marketing orientation will be in a position to confront a contracting market with any degree of confidence.

The market segments in which imports have the most significant impact are the low quality and low price ranges. In order to remain competitive, most Australian manufacturers use some imported product in the manufacture of their own product. The level of imported components will most probably rise in the next few years.

If Australian manufacturers continue to compete head-on with importers at the bottom end of the market, and the market is determined by price, they will lose out, as they cannot compete with Asia’s low labour costs. Logically, therefore, Australian manufacturers have to reduce market risk when there is direct competition from importers at the low price end of the market.

Conclusion

The globalization of world trade offers both opportunities and threats. The industrial sector will never be able to compete with Asia’s cheap labour. Therefore the industry’s business model should not concentrate on competing in an area where it will never have a chance to win. The industry needs to understand its own unique qualities in order to find a suitable orientation for its business model.


83

2.4.5. IMPACT OF Globalization ON THE FURNITURE INDUSTRY IN OTHER COUNTRIES.

The following section presents a series of country factsheets reflecting the effects of globalization on the furniture industry in various economies. The countries selected occupy important positions in world furniture production, although in the cases of Spain, Canada, the United States and Australia the corresponding factsheets are not included, as these cases have been dealt with in depth in previous pages. In compiling these factsheets, consideration has been given both to leading countries with high production costs and those with low costs. Each sheet shows the recent evolution of furniture production and consumption in the country, as well as the state of exports and imports. From an examination of the factsheets the following conclusions can be drawn regarding the effects of globalization on the furniture industry:

• The furniture production and consumption grew in the period 2000-2006, excepted in Italy (because of its tradition as an exporter) and Japan (because of the economic crisis of the last few years).

• The volume of domestic furniture consumption is higher than that of the domestic industry’s production in high cost countries. The only exception is Italy, which is clearly geared towards exports.

• Most international trade of furniture of high cost country origin is directed towards other advanced countries.

• With the exception of Italy, advanced countries display higher volumes of furniture imports than of exports.

• Advanced countries follow a dual pattern of imports, buying furniture from both, Southeast Asia and Eastern Europe.

• Furniture production of emerging countries has undergone an unprecedented boom in the period of 2000-2006, led by the growth of the Chinese industry.

• Furniture production in low cost countries (China etc.) has benefited from investments from advanced economies and from the learning process they have begun, enabling them to improve their processes and products.

• Most of the productive potential of countries with low production costs is directed towards external markets, with continuous growth of furniture exports volumes to developed countries.

Conclusion

In conclusion, the observed trend indicates that the furniture industry in emerging countries has begun a process of growth and consolidation in recent years. Its main markets are advanced countries, and thus a transfer of industrial capacity has taken place towards less developed economies, threatening the sustainability of the furniture industry in Europe, North America and other developed countries.


84

Exports

0

2,000

4,000

6,000

14,000

Production % cons/prod.

8,000

10,000

12,000

Furniture production and consumption in France in the period 2000-2006 (million USD)

Consumption

100%

120%

140%

180%

160%

20012000 2002 20062003 20052004

0

500

1,000

1,500

% var. exp.

2,000

2,500

3,000

Annual variation and value of furniture exports in France in the period 2000-2006 (million USD)

50%

30%

10%

-20%

20012000 2002 20062003 20052004

0%

-10%

40%

20%

Imports

0

2,000

3,000

4,000

% var. imp.

5,000

6,000

7,000

Annual variation and value of furniture imports in France in the period 2000-2006 (million USD)

50%

45%

25%

0%

20012000 2002 20062003 20052004

10%

5%

30%

1,000

15%

20%

35%

40%

Spain

Germany

Belgium

UK

Switzerland

USA

Italy

Portugal

Netherlands

Poland

2004 2005 2006

Destination of furniture exports

15.3%

12.6%

10.6%

11.1%

N/D

7.2%

4.3%

2.5%

4.5%

2.8%

18.1%

13.2%

10.9%

9.3%

7.6%

6.3%

4.6%

4.3%

3.5%

2.0%

18.6%

12.2%

9.5%

8.5%

7.3%

7.5%

4.4%

4.3%

2.6%

2.4%

Italy

Germany

China

Belgium

Spain

Poland

Portugal

Rumania

Indonesia

2004 2005 2006

Origin of furniture imports

24.2%

12.6%

4.6%

9.2%

8.4%

5.9%

4.0%

3.3%

2.7%

21.8%

12.1%

7.9%

7.9%

7.5%

6.9%

4.9%

3.0%

2.5%

21.2%

12.4%

8.5%

7.4%

7.7%

7.1%

4.7%

3.0%

2.2%

FRANCE

Source: Data compiled by AIDIMA from official sources in the country.

Percentage weight in relation to total



85

Netherlands

Switzerland

Austria

France

Belgium

UK

USA

Spain

Czech Republic

Italy

2004 2005 2006


15.3%

11.8%

10.2%

10.6%

8.7%

8.0%

4.2%

3.4%

3.3%

N/D

14.2%

11.5%

10.5%

9.9%

9.2%

7.8%

4.2%

3.9%

3.3%

3.1%

13.2%

10.7%

9.9%

10.7%

6.7%

7.8%

3.9%

4.2%

3.2%

3.6%

Poland

Italy

China

Denmark

Austria

Czech Republic

Slovenia

South Africa

Netherlands

Switzerland

2004 2005 2006

23.4%

11.0%

4.6%

6.0%

5.7%

8.7%

4.0%

4.0%

N/D

3.0%

21.9%

10.7%

7.8%

5.9%

5.9%

5.9%

4.6%

3.7%

3.4%

3.1%

22.2%

9.9%

8.7%

4.9%

7.0%

6.6%

4.3%

3.3%

N/D

3.2%


Annual variation and value of furniture imports in Germany in the period 2000-2006(million USD)

Furniture production and consumption in Germany in the period 2000-2006 (million USD)

Production % cons/prod.Consumption

Annual variation and value of furniture exports in Germany in the period 2000-2006 (million USD)

Exports % var. exp.

Imports % var. imp.

,

,

,

,

,

,

,

,

,

,

,

,

,

,

,

,

,

,

,

,

,

,

,

,

GERMANY





86

-10%

Furniture production and consumption in Italy in the period 2000-2006 (million USD)

Production % cons / prod.Consumption

80%

75%

70%

65%

50%

20012000 2002 20062003 20052004

Exports % var. exp.

Annual variation and value of furniture exports in Italy in the period 2000-2006 (million USD)

50%

30%

10%

20012000 2002 20062003 20052004

0%

40%

20%

20,000

0

80,000

100,000

120,000

0

10,000

15,000

20,000

25,000

30,000

60,000

40,000

10,000

5,000

60%

55%

Imports % var. imp.

50%

-10%

20012000 2002 20062003 20052004

10%

0%

30%

20%

40%

2,500

2,000

1,500

1,000

500

0

Annual variation and value of furniture imports in Italy in the period 2000-2006 (million USD)

France

UK

Germany

USA

Russia

Spain

Switzerland

Belgium

Greece

Netherlands

2004 2005 2006


12.7%

13.7%

12.6%

15.0%

4.1%

3.7%

4.0%

3.0%

1.8%

2.4%

14.6%

13.1%

11.8%

10.8%

6.2%

4.9%

4.1%

3.1%

2.2%

2.1%

14.6%

12.4%

11.2%

8.9%

7.3%

5.0%

4.4%

2.8%

2.4%

2.1%

China

Germany

Austria

Rumania

Switzerland

France

Indonesia

Spain

Slovenia

Poland

2004 2005 2006

10.9%

11.1%

11.6%

8.4%

4.7%

5.5%

5.7%

4.7%

3.6%

4.5%

15.8%

12.2%

11.9%

8.5%

6.8%

5.3%

4.9%

3.6%

2.8%

2.8%

17.7%

12.5%

10.4%

7.8%

5.5%

4.5%

4.3%

4.1%

N/D

4.2%


ITALY





87

80,000

60,000

50,000

40,000

30,000

20,000

10,000

0

70,000

30%

-10%

Production % cons / prod.

Furniture production and consumption in the United Kingdom in the period 2000-2006 (million USD)

Consumption

200%

180%

160%

140%

100%

20012000 2002 20062003 20052004

Exports % var. exp.

Annual variation and value of furniture exports in the United Kingdom in the period 2000-2006 (million USD)

10%

20012000 2002 20062003 20052004

0%

20%

600

0

12,000

14,000

16,000

0

4,000

6,000

8,000

16,000

18,000

1,000

800

200

2,000

120%

Imports % var. imp.

60%

-10%

20012000 2002 20062003 20052004

10%

0%

30%

20%

40%

Annual variation and value of furniture imports in the United Kingdom in the period 2000-2006 (million USD)

10,000

12,000

14,000

400

50%

Ireland

USA

France

Germany

Spain

Netherlands

Belgium

Japan

Italy

Sweden

2004 2005 2006


23.9%

18.8%

8.7%

7.5%

3.6%

4.4%

N/D

3.0%

2.3%

N/D

32.3%

14.2%

8.7%

6.3%

3.9%

3.8%

3.6%

2.7%

2.2%

1.6%

33.4%

12.5%

8.6%

6.0%

3.0%

3.5%

4.2%

2.2%

2.7%

N/D

China

Italy

Germany

Poland

Malaysia

Denmark

France

USA

Vietnam

Thailand

2004 2005 2006

13.6%

20.8%

8.9%

5.0%

3.8%

N/D

3.4%

N/D

N/D

N/D

21.6%

18.8%

9.1%

3.9%

3.1%

3.1%

3.0%

2.6%

2.3%

2.3%

25.2%

17.0%

8.9%

4.4%

2.9%

2.5%

2.6%

2.9%

2.4%

N/D


UNITED KINGDOM





88

JAPAN

180%

4,000

3,000

2,500

2,000

1,500

1,000

500

0

3,500

120%

-20%

Exports


Furniture production and consumption in Japan in the period 2000-2006 (million USD)

Consumption

160%

140%

100%

20012000 2002 20062003 20052004

% var. exp.

Annual variation and value of furniture exports in Japan in the period 2000-2006 (million USD)

80%

20012000 2002 20062003 20052004

60%

100%

200

0

500

600

700

0

20,000

25,000

400

300

5,000120%

Imports % var. imp.

60%

-10%

20012000 2002 20062003 20052004

10%

0%

30%

20%

40%

Annual variation and value of furniture imports in Japan in the period 2000-2006 (million USD)

10,000

15,000

100

50%

40%

20%

0%

USA

China

UK

Thailand

South Korea

Taiwan

South Africa

Indonesia

Canada

Malaysia

2004 2005 2006


32.6%

14.0%

10.7%

4.0%

4.7%

4.4%

N/D

3.8%

N/D

2.4%

31.4%

15.9%

11.0%

6.2%

4.6%

4.5%

3.5%

3.2%

2.5%

2.1%

5.1%

26.7%

12.8%

9.4%

5.0%

3.5%

3.4%

N/D

3.1%

2.4%

China

Thailand

Taiwan

Vietnam

Indonesia

Malaysia

Italy

USA

Germany

Austria

2004 2005 2006

33.8%

9.8%

9.0%

4.4%

6.3%

4.9%

5.4%

7.8%

3.2%

N/D

44.4%

8.6%

7.5%

5.7%

5.2%

4.7%

4.5%

3.4%

3.3%

2.0%

47.9%

8.2%

7.0%

6.4%

5.1%

4.8%

4.3%

1.7%

3.2%

2.1%






89

CHINA

USA

Hong Kong

Japan

UK

Canada

Australia

Germany

Netherlands

France

South Korea

2004 2005 2006


51.9%

12.2%

8.5%

4.6%

2.6%

2.5%

2.2%

1.5%

1.1%

1.3%

48.6%

9.6%

8.1%

5.2%

3.2%

2.9%

2.6%

1.7%

1.6%

1.5%

46.1%

7.1%

6.6%

5.7%

3.6%

3.0%

2.6%

1.7%

1.6%

2.2%

Germany

Japan

South Korea

USA

Italy

France

Poland

Spain

Malaysia

Austria

2004 2005 2006

24.4%

12.0%

9.5%

8.6%

7.1%

3.7%

3.1%

1.6%

N/D

N/D

21.5%

18.4%

11.3%

8.4%

6.0%

3.1%

2.7%

1.6%

1.4%

1.3%

19.2%

20.5%

12.1%

7.0%

5.4%

2.1%

2.6%

N/D

N/D

N/D


Exports

Production % cons / prod.Consumption

% var. exp.

Imports % var. imp.

Furniture production and consumption in China in the period 2000-2006 (million USD)

Annual variation and value of furniture exports in China in the period 2000-2006 (million USD)

Annual variation and value of furniture imports in China in the period 2000-2006 (million USD)

,

,

,

,

,

,

,

,

,

,

,

,

,

,

,

,

,

,

,





90

INDIA

2,500

50%

9,000 150%

2,000

1,500

1,000

500

0

0%

Exports


Furniture production and consumption in India in the period 2000-2006 (million USD)

Consumption

130%

110%

70%

20012000 2002 20062003 20052004

% var. exp.

Annual variation and value of furniture exports in India in the period 2000-2006 (million USD)

20012000 2002 20062003 20052004

200

0

350

400

450

0

7,000

300

250

1,000

Imports % var. imp.

50%

-10%

20012000 2002 20062003 20052004

0%

20%

10%

30%

Annual variation and value of furniture imports in India in the period 2000-2006 (million USD)

2,000

5,000

150

40%

40%

30%

20%

3,000

4,000

6,000

90%

8,000

100

50

10%

USA

UK

France

Italy

Spain

Netherlands

Germany

Australia

Belgium

Canada

2004 2005 2006


27.7%

19.6%

8.2%

5.3%

3.8%

5.3%

6.2%

2.0%

2.8%

N/D

27.9%

16%

9.6%

7.7%

5.4%

4.4%

4.4%

2.6%

2.3%

2.0%

28.9%

11.0%

11.0%

7.9%

6.5%

3.3%

5.2%

2.8%

2.2%

1.9%

Malaysia

Japan

China

Italy

Singapore

Germany

USA

Sri Lanka

Canada

France

2004 2005 2006

24.3%

18.1%

10.9%

13.7%

N/D

4.3%

7.4%

3.5%

N/D

3.3%

25.6%

15.4%

13.7%

10.0%

5.3%

4.8%

4.5%

3.4%

3.0%

2.0%

23.6%

9.4%

17.3%

9.6%

4.8%

5.0%

5.6%

3.4%

N/D

N/D






91

POLAND

8,000

1,000

100%

200%

900

800

700

500

0

0%

Exports


Furniture production and consumption in Poland in the period 2000-2006 (million USD)

Consumption

160%

120%

0%

20012000 2002 20062003 20052004

% var. exp.

Annual variation and value of furniture exports in Poland in the period 2000-2006 (million USD)

20012000 2002 20062003 20052004

2,000

0

5,000

6,000

7,000

0

7,000

4,000

3,000

1,000

Imports % var. imp.

150%

-30%

20012000 2002 20062003 20052004

50%

90%

70%

110%

Annual variation and value of furniture imports in Poland in the period 2000-2006 (million USD)

2,000

5,000

1,000

130%

80%

60%

40%

3,000

4,000

6,000

40%

20%

180%

140%

100%

80%

60%

20%

90%

70%

50%

30%

10%

400

300

200

100

30%

10%

-10%

Germany

France

UK

Sweden

Czech Republic

Netherlands

Belgium

USA

Slovakia

Hungary

2004 2005 2006


43.1%

8.0%

6.3%

4.5%

3.9%

4.7%

4.6%

2.6%

2.4%

N/D

41.9%

8.4%

5.8%

4.7%

4.5%

4.1%

4.0%

2.8%

2.3%

2.0%

38.7%

8.0%

6.1%

4.6%

5.6%

3.9%

5.6%

2.3%

2.5%

2.1%

Germany

Italy

China

France

Czech Republic

Sweden

Slovakia

Austria

Denmark

Hungary

2004 2005 2006

29.9%

14.9%

2.9%

12.2%

2.5%

4.1%

3.1%

4.8%

2.5%

3.0%

33.8%

10.5%

7.7%

6.4%

6.1%

5.0%

4.1%

3.3%

2.7%

2.1%

31.6%

9.2%

10.3%

8.5%

5.9%

4.5%

3.2%

3.4%

N/D

2.4%






92

BRAZIL

6,000

160

100%

180%

140

120

100

80

0

-20%

Exports


Furniture production and consumption in Brazil in the period 2000-2006 (million USD)

Consumption

160%

120%

0%

20012000 2002 20062003 20052004

% var. exp.

Annual variation and value of furniture exports in Brazil in the period 2000-2006 (million USD)

20012000 2002 20062003 20052004

200

0

800

1,000

1,200

0

600

400

1,000

Imports % var. imp.

80%

-40%

20012000 2002 20062003 20052004

20%

0%

40%

Annual variation and value of furniture imports in Brazil in the period 2000-2006 (million USD)

2,000

5,000

60%

80%

60%

40%

3,000

4,000

40%

20%

140%

100%

80%

60%

20%

0%

60

40

20-20%

USA

France

UK

Germany

Netherlands

Argentina

Spain

Chile

Canada

Mexico

2004 2005 2006


42.0%

13.9%

9.3%

4.8%

5.0%

2.0%

2.3%

2.2%

1.5%

N/D

41.3%

11.4%

9.9%

4.4%

4.0%

3.6%

3.4%

2.7%

1.6%

1.6%

33.0%

9.8%

9.2%

3.1%

2.9%

7.7%

4.3%

4.3%

1.8%

N/D

Germany

France

Spain

USA

Italy

China

Poland

Japan

Argentina

Uruguay

2004 2005 2006

35.0%

13.0%

12.1%

8.8%

9.2%

2.4%

N/D

2.9%

4.0%

2.3%

33.2%

14.2%

10.3%

9.2%

5.5%

4.2%

3.5%

3.5%

2.4%

1.8%

22.6%

11.9%

10.3%

14.5%

7.4%

9.0%

3.3%

5.7%

N/D

1.8%






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2.5. CONCLUSION:THE EFFECTS OF GLOBALIZATION ON THE FURNITURE INDUSTRY OF COUNTRIES WITH HIGH PRODUCTION COSTS

The country case studies that we have presented in the above Chapter, as well as the data and the trends discussed, highlight the strong impact that globalization is having on the global furniture industry. Although the effects may seem positive in the short term, since manufacturing companies have obtained access to less expensive sources of supply in emerging countries, the question arises as to whether the current strategies of offshoring and cost cutting can guarantee the sustainability of the industry in advanced countries in terms of profits and employment in the long term.

Competition of costs and the consequent improvement of efficiency only lead to temporary advantages for those manufacturers who find the best supplier in the world today, but it is far from being a sustainable advantage over time. Concentrating efforts on cutting costs may solve the industrial part of the question in relation to the competitiveness of furniture manufacturers of advanced countries, but it is a high-risk option, since in the long term it puts all producers on the same level in the face of the great world market, where emerging countries will continue to display much lower costs in the coming decades.

Improving efficiency must therefore go hand in hand with market measures to guide manufacturers towards a better understanding of users’ latent needs and demands at each moment. Gearing companies towards consumers, understanding their values and behaviour, enables them to be constantly anticipating events, which constitutes the real way to differentiate themselves vis-à-vis competitors with lower costs. It is the combination of both, efficiency and differentiation, that is the key to competitiveness for furniture manufacturers of high cost countries for the next few years.

Globalization has modified the competitive environment of the furniture industry in the context of the relationships between suppliers of raw materials, manufacturers and distributors, enhancing the negotiating power of the first in due to the shortage of materials and consequent price increases, and of the last, by enabling them to import cheap products from emerging countries and thereby substitute domestic manufacturers.

Table 2.5.1. Key factors of the relationships between producers and the other players in the value system of furniture in a globalised environment.

Raw material markets (panels, varnishes, etc.) functioningalmost as an oligopoly, undermining the negotiating powerof furniture manufacturers.

Rising prices of raw materials worldwide due to the increaseddemand for them from emerging countries, impacting onfurniture manufacturers’ costs.

Forward vertical integration of some suppliers of raw materials(e.g. panel manufacturers making kit furniture ormanufacturers of paintings launching their own collectionsto distribution).

Dependence of furniture manufacturers on suppliers ininnovation of materials to achieve a higher-quality finalproduct.

SUPPLIER-MANUFACTURER MANUFACTURER-DISTRIBUTOR

Increasing negotiating power of distributors as a result ofgrowing concentration of distribution channels (superstoresspecialising in household furniture, group buying, franchisechains, etc.).

Imbalance between the increasing size of distributors andthat of furniture manufacturers, who continue to act on anindividual basis.

Saturation of supply from furniture manufacturers, whohave difficulty in offering differentiated products todistributors.

Greater competitive pressure to cut prices in response todistributors importing increasing quantities of furnitureproduced in low cost countries.

Product development by manufacturers based on theexpectations of customers (distributors), not geared toconsumers.

Market knowhow controlled by distributors (marketing andadvertising), with consequent projection of the distributor’sbrand image at the expense of the manufacturer’s brand.

Reduction in collaboration between manufacturers anddistributors to energise sales outlets.

Logistics of final delivery controlled by distributors, withproblems of coordination with manufacturers and consumerdissatisfaction.


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The situation would not cause any concern if the industry located in low cost countries were not immersed in a process of improvement of production, technology and innovation, which systematically reduces its backwardsness in comparison to manufacturers of advanced countries. Indeed, the competitive advantage of costs enjoyed by emerging producers has led to important improvements of production quality, reaching levels totally comparable to those of European and North American producers in many cases.

It is interesting to find out how the main furniture distributors (who are also the main importers of these products in Europe and North America) perceive furniture produced in emerging countries compared to that produced in developed economies. The results of the European Distributors’ Opinion Survey carried out within Europe by AIDIMA in 2006 and 2007, by interviewing the main distributors in Spain, Germany, the United Kingdom, France and Italy, show the average assessment by attributes of furniture imported from China versus European furniture, establishing the following conclusions:

• China, according to the opinion of European distributors, has got closer to Europe in terms of value for money, quality of finishes, discounts for volume, delivery times and product suitability.

• The real advantage enjoyed by furniture manufacturers in high cost countries is the quality of finish of their products, their image/brand recognition and their range of styles and designs. These are the differential attributes which according to the opinion of European distributors, distinguish European furniture manufacturers.

• In general, China scores lowest on attributes related to logistics and marketing/promotion. Discount for volume and price are the main attributes involved in choosing Chinese furniture manufacturers. The factor that receives the worst evaluation from European distributors is returning damaged products.

Figure 2.5.1. Competitive differential between furniture production in Europe and China: European distributors’ perception of products from China and/or Europe: 2006 results.

Source: CEFFOR® Furniture Foresighting Centre.

Source: CEFFOR® Furniture Foresighting Centre.

Figure 2.5.1. Competitive differential between furniture production in Europe and China: European distributors’ perception of products from China and/or Europe: 2007 results.


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Similar results are obtained from studies of the same kind carried out by Forintek Canada Corp. in North America (Buehlmann et al. 2006, Lihra and Graf 2007). Surprisingly, furniture distributors valued other attributes of furniture from China rather than price. Moreover, the research revealed that distributors do not perceive a significant advantage for US furniture manufacturers compared to Chinese manufacturers in the Canadian market.

The trend is obvious: furniture production in emerging countries is improving its quality levels year by year, and so European distributors, who still value lower price and discounts for volume above all in 2008, are expecting an improvement of products and services for the next few years. If the trend continues, it will aggravate the substitution effect on the part of distributors towards emerging countries, to the detriment of European manufacturers’ production.

The improvement of production in emerging economies is an unstoppable phenomenon, but it would not be possible without the globalization of information and knowledge, the consequences that are dangerous because they generate processes of constant improvement of low cost industries. Its effects are more rapid for labour intensive sectors that have weak barriers for new competitors’ entrance such as furniture industry. The effects of globalization are accentuated when it is Western manufacturers themselves in developed countries who have begun the process and are accelerating it with their strategies of offshoring the production, transferring their knowhow to emerging producers with the intention of exploiting the competitive advantages of costs. This practice has pernicious consequences for the sustainability of the business model of furniture manufacturers, who enter a blind alley when they base their business on a virtually undifferentiated product where the price variable dominates the consumer purchase process. Unintentionally, the competitive advantages which countries enjoyed a priori, based on the knowhow of project development and technology in case of advanced countries and on costs, especially labour costs, in emerging countries, have been subverted. The consequence is clear: developing countries are excellent pupils with high learning ability and a need to improve their economic and living conditions, which leads to a rapid absorption of Western knowhow, and this, together with their low costs, is enabling them gradually to take over Western markets.


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The consequences of globalization become more severe for furniture manufacturers if distribution strategies are also taken into account. The concentration process of furniture distribution companies is generating large corporations that turn into scale economies that allow them to operate worldwide. By their presence in different countries through the network of shops and by supplying products from the international market, concentrated distribution reinforces the productive potential of emerging countries. As they grow in size, distributors enter a market of large volumes at low prices stored in purpose-built logistical platforms, reducing their dependence on manufacturers. In extreme cases, the power of distributors results in absolute control over the value system, monitoring the production costs of their suppliers and eliminating any strategic direction of manufacturers other than cost cutting.

Another key aspect, being also a consequence of globalization, is the homogenization of consumer preferences and habits. The lessons consumers have learned in other consumption sectors and a greater knowledge about the global trends have promoted the assimilation of styles of furniture that could be manufactured in any part of the world. The classic style, the modern-contemporary style or the colonial style, for example, are easily recognisable to consumers throughout the world, which reduces the advantages of the country-of-origin effect (Spanish classical furniture, Nordic design, etc.).

As consequence of all these occurrences, it is clear that the profitability of the furniture manufacturing business has fallen in recent years, and it is in the grip of extreme price competition and an inability to reorientate a traditional business based on the values of furniture as a product towards a new model centred on generating value for consumers on the basis of their needs at their homes.


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Among the solutions commonly proposed for the industry nowadays are expressed the needs for improving design for fostering consumer relations for improve productive efficiency, for adapting the production possibilities to the needs of the users, for implanting continuous improvement and for investing in to the training of qualified workers. However, all these aspects are conditional on strategic thought of a high order. Before adopting any operative procedure, a furniture manufacturer in an advanced country has to answer three crucial questions:

1. What identity should the furniture manufacturer have in the next few years?

Facing the obsolescence of the furniture manufacturer’s traditional business model, the need arises to evolve towards a new corporate identity. There is a wide range of options: manufacturers who turn into distributors, importing/marketing companies, vertically integrated companies... Any of these options involves a profound change of the current furniture manufacturing business model. Hybrids spring up between the traditional options (manufacturing, selling or importing), the predominant cases being the manutailer (a manufacturer who has vertically integrated forwards, taking on processes corresponding to distributors, such as running their own chain of shops) and the refacturer (a distributor who has vertically integrated backwardss, taking on design processes, product development and even control of the production process).

Figure 2.5.3. The corporate identity triangle of the furniture sector

Source: AIDIMA.

STRATEGIC REFLECTIONOF THE THREE CRUCIAL

QUESTIONS

What identity should the furniture manufacturer have in the next

few years?

What is the furnituremanufacturing company’s

value proposition?

Which market segment does the company operate in?


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2. What is the furniture manufacturing company’s value proposition?

Faced with the changes taking place in the industry, it is worth asking oneself what value consumers attribute to furniture as a product, since perceived consumer value is a variable that evolves over time. The consumer emerges as the central axis in the creation of competitive advantages, and it is therefore necessary to investigate and understand consumer lifestyles. It is a matter of getting closer to consumers in order to get to know how they think, how they live, how they feel and how they buy. Identifying these aspects provides a renewable source of opportunities for differentiation: trying to renew the functional values of furniture or incorporate emotional and social aspects which connect with lifestyles, by integrating complementary furniture-related products into the value proposition... Emotional value and social value offer the greatest potential for growth in the furniture market, because of their ability to help companies to find ways of differentiating themselves (even some Chinese and Indian producers are currently promoting intangible aspects in their communications).

By the same token, generating consumer value can be extended to the whole life cycle of products and not remaining limited to the moment of purchase. Thus the proposed new business model can include various services and products that add consumer value at different moments in time: when the furniture is created, during the buying process, while it is in use, when the furniture is renovated over the course of its life at the home, and when the time comes to dispose of it. The value offered by manufacturers is not always perceived, partly because they cannot find a distributor prepared to promote their values. There is a significant space for increasing the value delivered by manufacturers, as well as their communications, in a way that the difference between the value delivered by the company and the value perciered by consumers disappear.

Figure 2.5.4. Dimensions of consumer value in furniture buying in Spain

Source: AIDIMA.

Figure 2.5.5. Value generation cycle and options for improvement in the value proposition of furniture manufacturers.

Source: AIDIMA.


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3. Which market segment does the company operate in?

Manufacturers’ options are different depending on the price segment they are targeting at the market. In the bottom segment there are more difficulties due to fierce competitive pressure through imported products by organized distribution. On the contrary in the top segment there are smaller distributors who need manufacturers’ services and proposals in order to improve furniture communication to the sales point. For this reason, manufacturers need to consider which one is their reference segment in the market. As we will see in further chapters, the market structure varies depending on the future scenario of the industry.

In view of the effects described, it is essential to become fully aware of the strategic importance of the present moment, bearing in mind that true innovation begins with company strategy and that the future is in our own hands. We therefore need to open our minds and accept the process of change as something natural in living organizations that are constantly growing and adapting to their environment. This is just the first step towards enabling furniture manufacturers to find a new sustainable business model for the coming years.

Table 2.5.2. Critical variables in each market segment.

Table 2.5.3. Key factors for change in the furnituremanufacturing industry of advanced countries.


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Burt de TurckSecretary General

EUROPEAN FURNITURE MANUFACTURERS FEDERATION (UEA)Belgium

It is commonly thought that a solution for the hard market situation could be upgrading the position of the products to the highest segment of the market, but it is a false idea.It is false, because the companies operating in the highest segment of the market obviously manufacture high quality, designed furniture at very high prices and the demand for this kind of furniture is limited. The probability of a substantial growth of this part of the market is very small.

In case we are talking about a period of ten years, the high quantity of imports of low and medium category furniture will remain so the competition is occurring and will occur in these market segments.

“According to my opinion furniture manufacturers will have to have an evolution towards a direct relation and interaction with the consumers. Mass production is getting more and more linked to the external competitors, in a volume that it (mass production) even could disappear in Europe which means that the manufacturers that will survive at least in Europe, will be those enterprises which work together with the consumer in a very personalized way...”

Denis McGowanBusiness manager

INNOVAWOOD NETWORKIreland

“...The move towards globalization will not change in the near future and existing trends will be maintained. I think the approach from retailer point of view will continue, and we will see a high level of consolidation. We will see more large companies getting stronger and buying the smaller ones.From the manufacturer point of view the trends are developing towards a continuing need for efficiency and lean manufacturing. These are my impressions, I think there are still opportunities for reducing costs in manufacturing and in the future it will be an important element of all manufacturing businesses. The other trend that will continue is the growing import of furniture to the low end of the European market from the Far East in the next 10 years. ..”

THE OPINION OF THE EXPERTSIN EUROPE

THE OPINION OF THE EXPERTS IN THE WORLD

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Frances LLopisChief ExecutiveCASA DECORSpain

“I think existing companies have got to channel their operations, they’ve got to be more cost effective, they’ve got to concentrate on what the market is telling them, on what consumers are telling them, what consumers want and how they want it and when they want it and what consumers are getting once they’ve bought the product.”

Mino PolitiManaging DirectorFEDERMOBILI AND WEBMOBILI SRLItaly

“Europe should develop more projects for retailers and more retailer concepts which might provide more value added to the European suppliers.We are producing products of high quality, but in several cases this quality is not perceived by the consumers. Then what we have to do is to invest more in the retailers´ quality concept, and for this purpose it is important to create bigger companies, invest more, because these enterprises have to have a global role. “

Ewa RatajczakDeputy DirectorWood Technology InstitutePoland

“I think long term solutions could be the ones which are focusing on management issues and are more systematic, mainly through the need of changing management strategy in the companies. “


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Al SchulerResearch Economist

USDA FOREST SERVICEWest Virginia, USA

A key component of globalization is free trade with most barriers eliminated over time. Initially, barriers such as quotas and duties are necessary to protect domestic industries from unfair offshore competition. This gives domestic industries needed “breathing time” to prepare for global competition by investing in technology, people, and infrastructure. Unfortunately, many domestic furniture manufacturers in North America did not use this time wisely, and are now facing intense global competition. A major competitive advantage of U.S. manufacturers is proximity to the largest furniture market in the world (dollar basis). In addition, they have access to high quality hardwood fiber, an educated workforce, technology, and efficient capital markets. The challenge today is exploiting these competitive advantages. Much of today’s North American furniture is marketed as a commodity, and that means price (and cost structure) is the key determinant of profitability. The U.S., a high wage country, is finding it difficult, if not impossible, to compete on price. Somehow, the domestic industry needs to develop manufacturing and distribution strategies that complement our competitive advantages – that implies moving away from pure commodities, adding value, better marketing and distribution.

Sophie D’Amours UNIVERSITÉ LAVAL

FOR@C (DE LA FORÊT AU CLIENT)Quebec, Canada

“I think it will, but the future has nothing to do with the past (...). Companies in Canada are now investing greatly to achieve mass customization, quick deliveries as well as to establish new and closer partnership with their clients. Attempts where the producer provides more logistic services like inventory management and direct distribution to the end customer are being implemented. I believe these types of services and collaborative models will enhance the competitiveness of the enterprises adopting them”.

THE OPINION OF THE EXPERTSIN NORTH AMERICA


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Joe CarrollEditorFURNITURE TODAYNorth Carolina, USA

We will progressively see more manufacturers opening their own retail stores. Nowadays, it is becoming increasingly difficult to find new stores with sufficient sales volume to buy from new resources so some manufacturers have decided to create their own stores using their own distribution. These stores in turn become clients for their furniture. A company named Ashley Furniture in the U.S.A. opened its own stores about 8 or 10 years ago and is now the biggest retailer in the U.S.A. We will remind everybody that Ashley Furniture is a manufacturer whose production turnover is approximately 3,200 billion dollars. They now have more than 325 stores. In 1983 they only had total sales of 30 million dollars and now they are #1 in the U.S. in both manufacturing and retail. We predict more and more manufacturers will open their own stores in the future”

D. Robert Beauregard Department of Wood and Forest SciencesUNIVERSITÉ LAVALQuebec, Canada

“I do not believe that companies from rich countries will be able to carry on producing furniture in the same way they have done it in the past and at the same time be able to bear the Chinese competition. In my opinion, these furniture companies have a lot of work to do in order to incorporate the best Lean Manufacturing methods in industrial engineering. I think the first challenge is to have total control over these techniques and to apply them in a clever way. However while this is essential, it will not be enough”

“The next matter is to build up business relationships with the clients, where the information supplied by the client is important for the product configuration. It is key that companies be able to produce an item that the client can personalize both physically and functionally and also in relation with interior design and other services like after-sales service or alteration of the product.

Finally the third matter is the use of the most advanced technology.. These companies should use manufacturing automation as well as information technologies related to logistics management. They should aim at using information technologies to be able to deliver the goods in 48 hours keeping the cost to a minimum.

I think that through these three elements; lean production along with personalised products or services and information technologies, furniture companies in rich countries can sustain the competition in the future no matter where from. However, there is a lot of work to do to accomplish this.”


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Ian H. HearnGeneral Manager

THE FURNISHING INDUSTRY ASSOCIATION OF AUSTRALIAWestern Australia, Australia

“...We are all currently suffering the effects of a cheaper workforce in Asia. China has had a big impact on Australian producers. In the last ten years imports have gone from 5% to 50% of the total furniture sales in Australia. Furniture manufacturing is divided in high cost and low cost furniture. This has affected our lives. We say that the Chinese are taking some market segments away from us and we might be complicating our lives thinking that it is affecting us. We cannot fight against the way the economy works so we must rethink and redesign strategies to keep up. There is a market where Australian producers can definitely take part...”·

John OsmelakGeneral Manager

THE FURNISHING INDUSTRY ASSOCIATION OF AUSTRALIAVictoria, Australia

“...The national furniture market has seen an increase of imports of 326% during the last ten years. The last reports show that between now and 2010 about 200 national producers will disappear in Australia.

The majority of those who continue to compete in the low price range will be the first to see an end. However there is still hope for those who will compete in the upper markets. We believe that there is an opportunity especially with quality Australian furniture, well designed, made of solid Australian hardwoods.

I think the sector will suffer in the short term but there is a future for the high price range of the market, although there is no hope for the low range. Some home furniture manufacturers have already started to have bigger orders for different clients, i.e. hotels, aged care, hospitality (clubs). Therefore they will offer a mix of products; they will not produce exclusively home furniture...”

THE OPINION OF THE EXPERTSIN AUSTRALIA


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FORESIGHT SCENARIOSfor the furniture industry

03

3.1. INTRODUCTION

Foresighting methods are part of the traditional research tools for the exploration of potential futures employed by governments and large corporations since the mid-twentieth century. Born in the United States and developed further in France, foresighting research is linked to strategic planning, and its main objective is to recognise the relevant trends that will affect a specific activity.

Unlike other methods, strategic foresight does not attempt to predict the future (in a forecasting effort), nor to perform statistical projections on series of temporal data, but to do an exhaustive analysis of the possible outcomes of a system of variables.

Strategic foresight takes into account factors, actors and behaviours (as well as their relationships) that will have a decisive influence on potential future outcomes. This means the analysis has to include factors that may not have existed in the past, unexpected detours, or the emergence of external agents that will drive change. To do so, prospective research employs a series of tools such as the structural analysis of variable systems, the analysis of players or the creation of expert panels to ensure a realistic and accurate perspective on the system under investigation.

Prospective analysis results in the creation of scenarios as plausible and pertinent descriptions of the evolution which the variables may undergo. The main purpose of prospective methods is to anticipate the future with the challenges and opportunities it may involve, thus offering insights crucial to the development of adequate strategies.

The strategic foresight does not attempt to predict the future,

but to do an exhaustive analysis of the possible outcomes of a

system of variables


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AIDIMA has relied on strategic foresight since 2005, when it undertook the creation of the Furniture Foresight Centre (CEFFOR®), of international scope. The events described in the preceding chapter, brought on by the increasing globalization of the furniture sector, make it necessary to follow all the geopolitical, economic and social issues that will shape the evolution of the furnishing industry in the long run.

Far from being a transitory set of circumstances, globalization involves structural changes that shift the current added value of the furniture industry, both at the manufacturing and retailing levels. For small and medium-sized enterprises, which dominate the production structure of this sector, the above considerations apply even more significantly, given that their small size renders them particularly vulnerable to global market trends such as concentration in market structure and shares, the competition of low-cost manufacturers, etc.

The development of a business model capable of competing in the long run is crucial to adjust to the new times, so a forecasting tool such as CEFFOR® must be applied in to the repositioning of the company. This is why understanding the elements that will shape the future of the sector in the upcoming years is an essential first step to the definition of a suitable commercial identity based on a successful and up-to-date value proposition, with a process management geared to the delivery of such proposition in the most efficient and profitable manner possible.

This chapter illustrates the potential futures of the furniture industry in a 2016 time horizon, materialized into three sectorial scenarios. It starts out with an overview of the foresight model designed specifically for the furniture industry, called PREDICS®, along with a series of basic concepts that will support the understanding of this methodology. AIDIMA led the development of this analytical tool, with the input of its Canadian strategic partner FPInnovations-FORINTEK. For the creation of this foresight model, AIDIMA also collaborated with the prestigious French centre of prospective research LIPSOR, led by Michel Godet, and with the University of Swinburne, in Australia.

The chapter will expound on the global socio-economic context in which the activity of the furniture industry will unfold in the upcoming years. In particular, it analyses the influence of the global economy, demographic flows, and attitudinal changes as they pertain the furniture industry. Global scenarios are defined from a macroeconomic perspective as a preamble to defining scenarios for the furniture sector. The three sectorial scenarios are presented, starting with the description of the consumer trends that will characterize the market in 2016. For each scenario, it offers a description of the characteristics of the consumer, the distribution structure, and the competitive environment where the furniture enterprise operates. The presentation of each scenario culminates with a reflection on the main agents that influence the strategy of the remaining actors.

“When one considers the future competitiveness of the furniture industry in high cost countries, so many critical factors are identified that it is difficult to establish which the main challenge may be. It is a big black box. The purpose of the PREDICS® model is to reduce this complexity to facilitate the understanding and simplification of the problem, which is the first step towards its resolution”.

Jesús Navarro Campos.Director of Corporate Development AIDIMA,

IX International Congress on the Situation of the Furniture Sector and the Habitat.

Valencia, November 2007.

3 · Foresight scenarios for the furniture industry

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3.2. INTRODUCTION TO SCENARIO CONCEPTS.

Without attempting to elaborate methodological details, the text will now offer a series of notions introducing the work involved in the definition of CEFFOR® scenarios. Far from being a necessary reading for the understanding of the re-mainder of this publication, the following epigraphs explain a few concepts for the benefit of those who may be interested in learning more about prospective analysis.

3.2.1. SCENARIO TYPES

A scenario is a combination of variables that configure a future reality (in the case of CEFFOR® the scenarios stem from the key variables that will define competitiveness in the furniture manufacturing sector in the upcoming years). Each scenario will be defined not only by the value taken by those variables, but also by the relationships established among them, as well as by the interests of the actors that participate in the scenario.

‘THE COLLABORATION OF EXTERNAL EXPERTS IN THE GLOBAL SCENARIO DEFINITIONS IN CEFFOR®

AIDIMA received the collaboration of external experts in the process of defining the furniture sector scenarios. As a pre-vious step to sectorial analysis, there was a reflection from a global perspective on the evolution of the economic and so-cial variables that will affect the furniture sector in the future. The foresight of the possible futures from a global perspecti-ves provides a solid foundation for the subsequent definition of sectorial scenarios.

The participation of the team of Applied Economics and Te-rritorial Consultancy of Analistas Financieros Internaciona-les (AFI) was crucial at this stage. The close cooperation of AIDIMA and AFI made possible the definition of global macroeconomic scenarios and the establishment of relatio-nships between these and the sectorial scenarios of the fur-niture industry. This ensures the realistic description of the macroeconomic context in which the potential outcomes of the furniture industry will unfold.

On the other hand, the analysis of the social dimensions that influence the evolution of values and trends in consumers has been developed in collaboration with the group of Ita-lian sociologists FUTURE CONCEPT LAB. In this case, their contribution entailed the identification of subtle signs in the current markets that will shape generalized values and be-haviours by 2016. This information is extremely important, since it allows an understanding of some intangible aspects around which the manufacturer should construct its busi-ness model for the upcoming years.


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The future, in this case that of the furniture industry, depends on many factors, so many, that once they are included in the analysis, the number of possible combinations of these factors is too high and would lead to an impossible number of potential futures. Consequently, it is imperative that the prospective analysis focuses on a manageable number of scenarios. After all, the point is to propose some basic models to help us understand what the future of the furniture industry may be.

Some variable combinations give rise to implausible or improbable scenarios, so they were removed from the analysis. For instance, it seems far-fetched to think that in a ten years time all furniture stores will be gone and furnishings will be purchased solely through the Internet, so any scenario contemplating this possibility is eliminated. In contrast, it seems like that by 2016 a part of the national production of furniture will be located abroad. In this manner, it is possible to reduce the range of scenarios and give a focus to foresight analysis.

In any case, it is important to remember that the objective is to define reference models for the future in the furniture sector. This is to say that the analysis has to consider scenarios providing a broad perspective of the different basic situations that the industry may be facing in the future.

Furthermore, it is key to understand that each scenario represents a relational system between the variables that may play a supportive or detrimental role in regard to the other variables. For instance, in the case of the furniture industry, a macroeconomic framework of growth deceleration might limit the resources of manufacturers, and thus their growth potential.

Depending on these influences and relationships, different scenarios can be built applying a comprehensible logic: 1) The domestic furniture industry of the future may be structured as it is today, with the resulting positive or negative consequences; 2) The domestic sector may worsen in comparison to the present and lose competitiveness; 3) The sector may improve in the future and find means to be competitive and profitable.

Additionally, a second criterion is applied: the intensity of future changes, since they could be either subtle or drastic. Depending on the intensity of the change, we could encounter: 1) Contrasting futures, in which changes are subtle and there are no significant alterations relative to the current situation, and 2) Rupturing futures, in which change is profound, and unforeseen elements are incorporated, modifying the variables and the relationships among actors.


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The combining of the criteria of trends/change and of intensity generates a basic range of options for the future. Each of these options represents a fundamental scenario model. In prospective language, applied to the furniture sector, the categories of the possible futures are presented as follows: • Tendential scenario: (Also known as Business as Usual): A scenario ensuring a continuation of the trends observed in the sector up till now, with hardly any variation in the variables and the players. It involves a perpetuation of the present situation, but in addition it incorporates the consequences of current behaviour. In the furniture sector, if manufacturers focus exclusively on cutting costs to compete in the global market, in the future the sector may face a complete loss of competitiveness due to the fact that domestic manufacturers will never be able to attain the low production costs of developing economies.

• Positive moderate change scenario: a scenario involving a moderate and beneficial change for the national furniture industry, which may be influenced by players’ voluntary actions. For instance, it could be that the production costs in developing countries increased lightly in the upcoming years due to certain regulatory policies by international agencies, which would in part reduce the productive investments in these countries. This way, the industry would not undergo any significant transformations in relation to the present, although there would be subtle changes in the level of imports.

• Negative moderate change scenario: A scenario involving a moderate but detrimental change for the national furniture industry. It may be influenced by the predominance of the interests of certain players over others or by unexpected events. For instance, the regulation of carbon dioxide emissions with the objective of stopping global warming entails additional costs to the manufacturer. This does not alter the structure of the furniture business, but it has a small effect on manufacturing conditions.

• Disruption scenario: the one that which involves an intense structural shift, with drastic and unfavourable modifications in the variables and the actors. This type of scenario entails serious transformations in the domestic furniture industry, whose circumstances change for the worse. The disruption scenario incorporates elements that do not exist in the present, such as technological revolutions or the emergence of new actors with opposed interests or unsustainable practises. For instance, a few decades ago it was impossible to foresee the momentum with which China has irrupted the global economy, and the consequent shift in the international trade of furnishings and furniture components.

• Normative scenario: that which involves an intense structural change that is favourable to the domestic furniture industry. It is the most positive scenario among all the possible ones, due to the proactive efforts of the actors. In the case of the furniture sector, a normative scenario entails an increase of the competitiveness of furniture manufacturing firms and their profitability due to effective industrial strategies geared towards differentiation or to enter to new markets. It is called normative because it establishes a norm to be observed, that is, a long-term objective for the industry.

Reducing the analysis to three potential scenarios seemed to be a sensible measure for facilitating the process of research and applying the results to businesses, discarding scenarios of moderate change since they do not represent a significant deviation from the business-as-usual scenario. In this sense, this publication focuses on the scenario definitions that can have the biggest effects on the domestic furniture manufacturer in the upcoming years: the trend scenario, and two disruption scenarios (one normative and one negative).


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3.2.2. TIME HORIZON: 2016

An essential issue in any prospective effort is the choice of a time horizon. Prospective studies tend to cover broad spans of time, with scenario definitions looking twenty, thirty and even fifty years into the future. However, when it comes to the furniture sector there were numerous reasons why it seemed that the horizon needed to be closer, and 2016 was selected as the time limit for the foresight analysis of the industry:

• Usefulness to businesses: the timeframe under study must guarantee that the results are useful and applicable to the companies of the furniture sector. This is why the horizon cannot be too far in time, since this would risk the realism of the scenarios, reducing their plausibility. 2016 is a close enough date that businesses can take into account the described scenarios in their strategic planning for the upcoming years.

• Space for change: The prospective horizon must provide a large enough timeframe to allow the development of substantial changes in the furniture sector. It should not be forgotten that each variable evolves according to its own rate, some of which may be of a cyclical nature, so a minimum time horizon is necessary to ensure the maturation of the structural changes that will be taking place in variables and actors. 2016 is a far enough date to give place for such changes to develop, yet not far enough to threaten the realism of the defined scenarios.

• Coherence with the global context: The need to tie the furniture sectorial scenario definitions to their world-wide macroeconomic context narrows down the potential horizons for the analysis, since it takes time for socio-economic processes to produced discernible structural changes. A ten year long horizon seems the minimum conceivable span allowing for significant changes. Beyond this horizon, uncertainty grows quickly.

Therefore, this prospective study by CEFFOR® contemplates a time horizon of ten years. Keeping in mind that the foresight analysis of the furniture industry started in 2005, the selected horizon would then be 2016, at the boundary between too-short horizons and too-long ones, where the prospective effort may remain useful.

3.2.3. SPATIAL RANGE: HIGH COST COUNTRIES

The geographic frame for the future scenario definitions spans those countries of high production costs. The reason for this could not be simpler: both Spain and Canada are two such countries, and therefore the scenarios defined by CEFFOR® have to meet the needs of their domestic furniture sectors. Thus, the schemata of this publication correspond to the circumstances facing furniture manufacturers in high cost countries.

Nevertheless, the fact that this publication focuses on the furniture manufacturing industry in high cost countries does not mean that it has neglected to analyse the variables involved in other regions of the world that have an impact on the competitiveness of the domestic manufacturer. For example, one dimension that cannot be overlooked is the evolution of competitiveness in manufacturers from developing countries.

Lastly, the definition of global scenarios also contemplates different regional contexts, because the changes associated to each scenario do not only happen in a given time span, but also may evolve differently, depending on the regional context. This is particularly relevant in the analysis of the dimensions that define the global context in which the furniture manufacturer operates. Variations in demographics, product specialisations, regulations or policies, for instance, set boundaries of scenarios in the different regions. Despite the increasing globalization, the homogenization of cultures is a gradual process, so such considerations had to be taken into account in the global scenario definitions.


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3.3. GLOBAL SOCIOECONOMICSCENARIOS IN 2016

The definition of scenarios for the furniture industry must be undertaking in the framework of the global context in which the sector operates. This is why it is necessary to foresee the potential global scenarios in 2016 prior to constructing the sectorial scenarios. By global scenarios we are referring to those defined by general dimensions that are not specific to the furniture industry, but apply to every sector of production, such as the state of the global economy or of world demographics.

3.3.1. THE SIX DIMENSIONS OF THE GLOBAL CONTEXT

In constructing the global scenarios, up to six dimensions were considered that affect the economic activity in general at a global level, and also the furniture sector in particular. In turn, each global dimension includes several global variables (twenty-three altogether), which allowed the construction of baseline socio-economic scenarios that are the base of the future of the furniture sector in Spain and other high cost countries.

The six dimensions encompass the complexity of global issues, and expose the interactions that exist between them:

• DemographyThe driver of shifts at a global level. Population is expressed by means of its growth, its flows, and its composition by ages, nationalities, ethnic origins, etc. Population flows can be massive in short time spans. The passage of generations involves a constant renewal of the predominant behaviours as each generation adapts to the vital cycle of individuals and the households that they form. Some of the major variables within the demographic dimension are Population, Housing, Lifestyles and Values. Specifically, knowing the evolution of these demographic aspects, such as age groups, generational issues, or housing, is crucial to tackle competently the definition of future scenarios to be faced by the furniture sector.

• TerritoryTerritory is a material dimension that determines the potential capabilities of the population in its various manifestations. It represents the site of the facilities and infrastructures needed for the productive or relational activities of the population. In addition, it is the basis of the population system. By means of congestion or dispersion, the territory creates the restrictions that human activities need to take into account for their own sustainability. The variables considered by the territory dimension are Urbanization, Infrastructure and Environment. Though not as directly as demography, this global dimension also affects the furniture sector to the extent that it has an influence on the possibilities of economic growth.

DEMOGRAPHY

TERRITORY

AGENTS

MACROECONOMIC EQUILIBRIUM

MARKET EQUILIBRIUM

GLOBAL RELATIONSUrbanization, Infrastructure and Environment

Population, Housing, Valuesand Lifestyles

• Demography • Territory


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• AgentsThese are the more or less organized collectives holding a certain power and influence in the society. Each agent has its own behavioural guidelines, although these are subjected to legal or social codes. These codes can be more or less coercive, or more or less efficient in fostering the convergence of behaviours that result in global equilibrium more or less stable or favourable. Some of the most important agents are: Consumers, Companies, Public Administrations and International Organizations. Not every agent affects the furniture sector to the same extent, but the great global agents can have an indirect influence on the competitive environment of the manufacturer. A higher degree of deregulation or higher subsidies for the export of furniture in certain countries for instance.

• Macroeconomic equilibriumThe decentralized behaviour of the agents determines a series of macroeconomic outcomes that are more or less stable or favourable. Generally speaking, these equilibrium are manifested dynamically as oscillations around trends towards progress that may vary among economic regions and countries. In general, the great macroeconomic equilibrium interact on each other, determining the overall efficiency of economies and their economic cycles. The growing economic interdependence of countries compounds the contagion risk of unfavourable situations, and fosters the growth of developing economies, generating various different foci of development around the world, which makes necessary to analyse variables such as Growth, Inflation, Employment, Budget Balance and External Balance of the different regions of the world. The consequences of the sudden emergence of these focuses will have a decisive impact on the future of the furniture industry, as it has become evident in the past few years.

Consumers, Companies, Public Administrations and International Organizations

Growth, Inflation, Employment, Budget Balance and External Balance

AgentsMacroeconomic equilibrium


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• Market equilibriumValue added is a result of the dynamics of the food and services market and a series of domestic and foreign factors. Certain markets are globalised to a high extent, as in the case of the capital markets and of raw materials, manufacturing, and services markets. It can’t be stated that they function without limits as that the regulatory pressures have disappeared, so the influence of these equilibrium will influence the global context in which the furniture manufacturer operates. Among the market equilibrium that have to be taken into account are Competition, International Trade and Capital Markets.

• Global relationsThe systems of global relations formed by the interaction of economics and geopolitics are not free from challenges to governability. These relationships have enough power to bear a positive or negative influence in the global outcomes of the market and the economies for long periods of time. The fragility of global governance systems is manifest, and the risk for disagreements among countries and large regions of the world are evident in the many fronts in which these global relations come to play. In this dimension, the scenarios should consider variables related to the levels of Governance, Cooperation and Development, the directions of Economic Policy, the evolution of Technology and Knowledge, as well as the evolution of Resources. In the furniture sector, these relations can shape threats and opportunities of varying degrees for the manufacturer at the international market.

Competition, International Tradeand Capital Markets

Governance, Cooperation and Development, the leanings of Economic Policy, the evolution of Technology and Knowledge and the Resources

Market equilibrium Global relations


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Table 3.3.1. Global dimensions and variables defining the global socio-economic scenarios in 2016.

Source: Analistas Financieros Internacionales.

Population

Households

Values and Lifestyles

Demography

Urbanisation

Infrastructures

Environment

Territory

Consumers

Companies

Public Administrations

International Organisations

Agents

Competition

International Trade

Capital Markets

MarketEquilibrium

Governance

Cooperation and Development

Economic Policy

Technology and Knowledge

Resources

GlobalRelations

GLOBAL DIMENSIONSAND VARIABLES DEFINING A GLOBALSOCIO-ECONOMIC SCENARIO

Growth

Inflation

Employment

Budgetary Balances

Foreign-held Balances

MacroeconomicEquilibrium

3.3.2. RECENT EVOLUTION OF THE GLOBAL SOCIOECONOMIC DIMENSIONS

An overview of the evolution of global variables of the past few years facilitates the establishment of the most relevant trends and their orders of magnitude towards a consideration of their future development. Furthermore, it is necessary to evaluate the degree of stability that the variables may display in the future.


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PopulationThe world population reached 6,600 million people in 2007. This figure has practically tripled since 1950, when the world population was 2,500 million people. However, the annual population growth rate has decreased from its maximum rates, higher than 2% in the 1960s, to below 1.2% at present. The years between1977 and 1987 represented a temporary suspension of the decline in population growth rates that had started in the 1960s. In 2005, 190 million people (almost 3% of the world population) resided in a country other than their native one, and 115 million of them had migrated to developed countries. The remittances sent by this migrants to their countries of origin reached $225,000 million.

HouseholdsThe number of households in the world is estimated at about 1,900 million, with an average size of 3.9 people per household. Households in North Africa and South Asia are at the first place in size, while Japanese and Western European households barely average 2 persons per household. Household size has declined gradually as fertility rates decreased and extended families gave place to nuclear families (only parents and children). In 1990, the synthetic fertility rate was 3.1 children per woman of childbearing age, while at present this rate is of 2.6 children per woman, above replacement level (2.1). Developed countries have undergone an intense process of family restructuring that has affected the size and composition of households, as divorce, second marriages, single-parent households and same-sex couples have become generalised. As a result of the smaller size of households and the population growth, the number of households is growing faster than the population in most countries. The creation of households is dynamic in emerging and developing countries, but in developed countries households also form as a result of evolving lifestyles and the arrival of immigrants. On the other hand, the construction of housing is in flow in many countries in an attempt to meet the increase of households. Housing cycles tend to be relatively synchronised among the major economies, though not necessarily on a global scale. In the last decade, several industrialised countries, among them Spain, have experienced active cycles in the real estate

DEMOGRAPHY Population · Households · Attitudes and Lifestyles


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market that culminated in 2007.Attitudes and LifestylesThe evolution of lifestyles and attitudes is slow, even across generations. Among the factors that facilitate changes in these areas are technological and scientific breakthroughs, the influence of mass media, economy and demography, changes in moral values, and the evolution of religious, cultural or political value systems. Some of these factors, like technological innovation, have changed very rapidly, but for most of them the change is gradual and continuous. In case of Spain, traditional value systems have weakened in the past decades, a change fostered by democracy, which favours values leading to individual freedom and relationships based on personal affinity. As the economy grows, individuals are likely to travel and engage in leisure activities, which has generated an increased demand for things that go beyond the basic needs of living. Decreasing retirement age combined with advances in healthcare have contributed to a drastic

shift of attitudes towards a more active lifestyle. In 1950 the number of tourists arriving from foreign countries was 25.3 million people; in 1975 it had increased to 222 million, and in 2006 the number of international tourist arrivals reached 840 million. These data evince the importance of leisure and the search for pleasurable experiences as society develops, and reflect a gradual development of lifestyles based on materialistic and modern values, to the detriment of more traditional and altruistic ones.

DEMOGRAPHY Population · Households · Attitudes and Lifestyles

Figure 3.3.1. Evolution of world population. 1955-2030.

Source: US Census Bureau


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TERRITORYUrbanization · Infrastructures · Environment

UrbanizationIn 2007 the world’s population reached the 50% milestone, referring to the amount of people that live in cities versus those living in rural areas. Still, 15% of the world’s population live in shanty towns, which means that a third of the urban population worldwide lives in unsanitary conditions and pos-sibly has lifestyles inferior to those of rural areas. The evo-lution of urbanism in the past few decades has been rapid, since in 1975 there were only three conurbations with popu-lations over 10 million (3.5% of the total urban population), while in 2005 there were already 20 such conurbations with over 10 million inhabitants (9.3% of the urban population). Unbridled urbanization has been the norm in developing countries, as poverty, wars and natural disasters have forced the population away from rural areas to end up in cities that lack the infrastructure to take in such sudden and massive immigration flows.

InfrastructuresIt is estimated that the world contains about 29 million kilo-metres of roads and a million kilometres of railroads. The de-velopment of infrastructures is often slow, and even in deve-loped countries it is hard for infrastructures (manufacturing facilities, main roads, sewage systems, hospitals, schools…) to be ahead of the needs of the time. In developing coun-tries, the conditions are worse and the existing infrastructu-res tend to be congested and in disrepair.


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Figure 3.3.2. Evolution of world population. 1950-2030.

Source: Food and Agricultural Organization (FAO).

EnvironmentAbout 30% of the Earth’s surface (which is not covered by oceans) consist of woodlands. In Japan, this figure goes up to 66%, while in South America and Central Africa it drops to 50% and 55%, respectively. At the global level, there is a decreasing trend: almost 1.3 million kilometres square of net woodlands were lost to the world in the 1990s, with the highest decreases in continents characterised by underde-veloped and emerging economies: Africa (which bore 48% of the world-wide woodland loss), South America (31%) and Asia-Pacific (21%). In the past decades the impact of cer-tain environmental phenomena has rekindled the ecological awareness of many countries. The fight against global war-ming and the greenhouse effect are the heated causes of transnational advocacy groups that have created a concern for sustainability at a global level. Sustainability always refers to the possibility of maintaining the status quo. The “ecologi-cal footprint” (EF) is a measure of the area of land needed to sustain a specific lifestyle for the population. Its calculation includes environmental pollution as well as the consumption of foodstuffs, wood, fuels, fibres, and other natural resour-

ces. The EF is expressed in per capita global hectares Gha). Several studies suggest that the per capita Gha should be 1.45 for the current lifestyles to be sustainable, but while the average per capita EF in the world is 2.2 Gha, North America has an EF of 7.7 Gha per person, and South Asia and Cen-tral Africa have ecological footprints of 0.7 Gha per person, which evinces an unequal distribution of ecological impact among the nations of the world.

TERRITORYUrbanization · Infrastructures · Environment


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AGENTSConsumers · Companies · Public Administrations · International Organizations

ConsumersWorld consumption grows regularly along with household incomes and the number of households, especially in emergent countries. Since 1995 the world has experienced a phase of sustained growth that in the past few years has experienced an unprecedented acceleration since the end of World War II. This involves the growth of middle classes in developing countries, which leads to an increased domestic demand. Private spending worldwide amounted to $20 billion in year 2000, and the emergence of a new global class of consumers is now a fact, as it represents about 1,700 million people (over one fourth of the world population). Half of this global class lives in emerging or developing countries, which are also the ones that hold the greatest potential to add to the number of consumers in the world.

CompaniesThere are hundreds of millions of companies in the world, the vast majority of which are of a very small size. What matters, however, is the way in which large corporations carry themselves in the global scene. Domestic markets are more permeable to international corporations, that grow in number as globalization grows. The number of business mergers and acquisitions have been multiplied in the past few years, after a short trend downturn between 2000 and 2003 years, although this type of operations are influenced by the general economic circumstances. 2006 closed up with over $3 billion of mergers and acquisitions, corresponding to some 39,000 operations with an average worth approaching $80 million. About 28% of these operations concentrated to the manufacturing sector, though this proportion is decreasing in relation to that of mergers performed in the service sector. North American, European and Japanese companies perform the bulk of world operations, though companies in Asia and other emergent economies are participating in this global trend at an increasing rate.

Figure 3.3.3. Worldwide evolution of business mergers and acquisitions. 2000-2006.

Source: Economic and Financial Affairs.


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Figure 3.3.4. Evolution of government spending. 1995-2005 (%)

Source: AFI.

AGENTSConsumers · Companies · Public Administrations · International Organizations

Public AdministrationsThe past few years have displayed a certain convergence in the size of the public sector in developed countries. Nowadays, non-essential functions are outsourced to private companies, although governments still carry out budget appropriations to ensure their performance. The reform of welfare in some states has been designed with the aim to contain.

Emerging and developing countries, however, are applying original strategies of public-private cooperation for the creation of infrastructure, employing the bulk of their scarce resources to meet the most basic and urgent needs, such as healthcare and education. Among such formulas are Project Finance and Public Service Concessions in which private agents are involved in the construction and operation of infrastructure projects that the government would be unable to carry out otherwise. Regional and sub-central governments are emerging in many countries impulsed by new theories of public management and political trends that advocate for a closer interaction of the public sector and the citizens. In developing countries, however, the tax and transfer systems are still limited and inefficient, so the resources do not suffice to meet everyday needs or finance the building of infrastructures.

International OrganizationsThe international monetary management system outlined at Bretton Woods in 1944 and implemented after World War II has changed in a relatively small dimension, in terms of the institutions that conform it. Nevertheless, some of its features, such as the gold standard, have become obsolete. In the meantime, the world economy has changed enormously, along with the macroeconomics of the major regions of the world. The process of globalization calls for new apparatuses of international governance, and there are some countries that are barely represented in the current institutions, which would require a degree of modernisation. If these changes are not carried out soon, so that the participation of emerging and developing countries is more reflective of their role in the world, it is possible that these international organizations will lose credibility due to their inability to face global issues that did not exist barely half a century ago.


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GrowthThe world economy has grown at a yearly rate above 4% in real terms in the past decade, which makes it one of the longest periods of prosperity in the past sixty years. In the last five years, the world economy grew by 5% a year, while in emerging and developing countries it grew by between 7% and 8%.

The economic growth of China, India and other emerging economies has fed the global growth in a continuous manner, despite of the more modest contribution of developed countries, and of Western Europe and Japan in particular. The “uncoupling” of the main global economic engines, a fairly recent development, is facilitated by the strong performance of emerging economies that have their own sources of growth. This means that a potential recession in the North American or European economies would not be transferred in full to the world economy, as has been the case until not too long ago. This fact presents great opportunities for global companies that, by diversifying across different regions of the world, benefit vastly from the fact that a worldwide recession is less likely to occur under these circumstances. In any case, it should not be forgotten that most of the companies in the furniture industry are MSMBs with limited options at the global level.

InflationThe inflation of the consumer prices index has converged in countries to an unprecedented extent Since around year 2000. In 2005, worldwide inflation remained stable at about 4%, although developed countries had rates around 2.1% while the rest of the countries tripled this figure. The situation is in stark contrast with the observations of the early 1990s, when inflation in underdeveloped countries reached 100% while developed countries had rates around 4%.

Figure 3.3.5. World GDP growth. 1990-2007 (%)

Source: IMF. Source: World Economic Outlook

Figure 3.3.6. Evolution of inflation in the world. 1980-2007 (%)

MACROECONOMIC EQUILIBRIUMGrowth · Inflation · Employment · Budgetary balances · Foreign-held balances


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A key factor to control inflation at a global level has been the increased competition in the international markets brought on by the entry of cheaper goods from emerging economies. The deregulation of world markets and the considerable growth in the trade of goods and services did the rest. Inflationary crises happen with relative frequency, but in recent years the central banks have learned how to contain inflation and coordinate their monetary policies to keep the increase of price levels under control.

EmploymentUnemployment continues to be a chronic issue in underdeveloped economies. Developed countries, on the other hand, enjoy relatively low unemployment rates since the end of the complicated years of the long oil crisis. In the early 1990s, advanced economies had all but attained their full employment capacities, with unemployment rates below 6%. The deep recession of years 1991-92 increased this rate to 7.5%, but the sustained economic expansion (with the exception of the slowdown between years 2001 and 2003 due to the burst of the .com bubble and the impact of the terrorist attacks of September 11 2001) has decreased unemployment rates in these countries back to natural unemployment rates, below 5.5%. This development suggests that as long as slowdown or recessionary episodes are short-lived, these countries will not experience massive unemployment.

Figure 3.3.7. Unemployment rates in advanced economies. 1990-2007 (%)

Source: IMF.

MACROECONOMIC EQUILIBRIUMGrowth · Inflation · Employment · Budgetary balances · Foreign-held balances


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Source: IMF.

Figure 3.3.8. Budgetary balance of advanced economies. 1990-2008 (% of GDP)

MACROECONOMIC EQUILIBRIUM Growth · Inflation · Employment · Budgetary balances · Foreign-held balances

Budgetary balancesA budget deficit is the norm rather than the exception in almost every country, including developed ones. Measured as a percentage of the GDP, the public debt shows a strong pro-cyclical evolution, improving when the GDP grows for an extended period of time, and worsening when growth slows down or the economy enters to a recession. Eventually, when the GDP grows for a long period of time there is a budget surplus even if budget deficits are usually the norm. This leads to an accumulation of debts and to hight amounts to be payed as interests that limit the capacity of governments to engage in other expenditures or capital investments and eventually leads to increase of taxes. Some advanced countries have maintained large budget deficits for extended periods of time. This has been the case of Italy, Belgium, Japan or the USA. In some of them, the public debt has reached the levels of the GDP.

This is a very volatile indicator and is very sensitive to the general economic conditions, so a recession can quickly compromise the financial situation of a government. On the other hand, when a period of sustained growth occurs, the fiscal situation can turn around in full, lifting the country to a much healthier state as it pertains to the public budget.


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Foreign-held balancesTraditionally, advanced countries tended to hold healthy current account balances that, expressed in terms of foreign-held balances related to the GDP, translated to positive, if small, balances. In contrast, the remaining countries bore chronic deficits in their current accounts, with dire episodes in the balance of payments that indicated account deficits. The fact that developing countries specialised in the production of raw materials was the main cause of this situation in which the terms of exchange worked against them and were beyond their control. Since the mid ‘90s; the situation has changed drastically and emerging countries have come to have large financial account surpluses expressed both as percentages of their GDPs and in real terms, while advanced economies tended to suffer from financial account deficits, if only of

moderate sizes. Not only have the exchange of raw material have resulted more favourable for the exporting countries, but the latter have expanded their manufacturing sectors towards the production of a broader and more sophisticated range of goods that are in high demand at the world markets, which involves high foreign exchange reserves for the producing countries.

Such changes in the global pattern of balance of payments are likely to last for a long time, until the emergent countries engage in a more active demand for goods and, more importantly, services produced in advanced countries.

Figure 3.3.9. World current account balance. 1990-2007 (% of GDP)

Source: IMF.

MACROECONOMIC EQUILIBRIUM Growth · Inflation · Employment · Budgetary balances · Foreign-held balances


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MARKET EQUILIBRIUM Competition · International trade · Capital Markets

CompetitionGlobalization creates world markets that are increasingly opened to all sorts of companies and in which survival demands highly competitive profiles, particularly in terms of cost management. The rules of international markets for trading goods are increasingly liberal, but this is also true for the service sector, including international financial and investment institutions. Though it is unlikely that a return to generalised protectionism will occur, different types of protectionism can take place to the extent that countries favour their own companies and, in the case of developed countries, try to protect themselves from the entry of low cost countries into the global markets. Despite the existence of a global regulator of commerce (WTO), there is no global authority to prevent monopolies and put a halt to the problems caused by protectionism. So it is unlikely that there will be rapid progress towards equitable rules for competition among countries. Despite this, some domestic markets are more competitive than others, particularly in Anglo-Saxon countries, which are more opened to multinational corporations, while the countries of mainland Europe tend to protect their companies, as if they were “national champions”, from foreign competition or acquisitions.

International tradeInternational trade is increasingly deregulated, despite certain obstacles to the deregulation of service trading. The barriers to the entry of goods from other countries have been reduced considerably by the successive rounds of the now defunct GATT by means of tariff cuts. Still, other barriers that do not involve tariffs remain in technical norms. Subsidies and other protectionist measures still exist in specific sectors, like agriculture. Nevertheless, world trade has grown in the past few years at yearly rates approximating 7% , and international trade exchanges constitute one of the most dynamic economic forces of our times.


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Capital MarketsThe number of international financial transactions increases rapidly as new information technologies and market deregulation allow real-time financial brokerage across time zones. Globalization also depends on the fast transfer of funds from one country to another (while influencing it in turn), so that direct foreign investment decisions of multinational corporations can be implemented. But the great complexity evolving in the international capital markets involve higher systemic risks, as the integration of financial markets binds ever more tightly the financial products and economic decisions of agents worldwide. At present, the world economy has various engines that are not necessarily coupled to the same cyclical pattern. Financial crises and the contagion of problems among national financial systems affect more countries simultaneously than ever before,

creating higher risks for the global economy and demanding that policies were coordinated at the international level. The subprime mortgage market crisis that started in the USA in August 2007 has evolved into a crisis of the credit sector affecting all developed countries, and is a good example of the increasing complexity of the markets. At the same time, the financial integration of the past few years has allowed households and companies all over the world to access cheaper and better financial services that may not even have existed a few years ago.

MARKET EQUILIBRIUMCompetition · International trade · Capital Markets


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GovernanceIt is a known fact that the quality of institutions is directly correlated to the economic performance of the countries, though it would be challenging to establish the origin of causes. The large income gaps between countries are related to acute differences in governance. The worldwide governance indicators, elaborated by the World Bank, paint a picture that is a faithful reflection of the insight above. Advances in the quality of institutions and in the control of corruption are slow, and whereas there is a mild global trend towards improvement, there are often local reversals that impede a generalised trend towards better standards. In general, it is rare to find ostensible improvement in countries that had low WGIs a few years before, or vice versa, and the norm is that each country remains in the same situation for a long period of time before a substantial change occurs (Kaufmann and Kraay, 2007).

Cooperation and DevelopmentDevelopment cooperation is one of the main sources of economic relations between developed and developing countries. At present, the official flows exceed a hundred billion dollars, having registered a significant increase since the 1990s. There are years in which official development assistance is higher than the global flows of direct foreign investment. The main donor in real terms is the USA, responsible for almost one fourth of the total flows in 2006 about 23 billion dollars), though in relative terms it is the Scandinavian countries that devote the highest percentages of their gross national product to this effect, at about 1% (in excess of the United Nations official target of 0.7%).

Source: Kaufmann and Kraay.

Figure 3.3.10. Worldwide control of corruption. 2006.

Figure 3.3.11. Percentage of gross national income devoted to official development assistance. 2006.

Source: OCDE.

GLOBAL RELATIONSGovernance · Cooperation and Development · Economic policy · Technology and knowledge · Resources


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Figure 3.3.12. Percentage of national income allocated to promoting development. 2006.

Source: UNCTAD. Information Technology Report 2006.

Official development assistance is only a portion of the flows that reach the poorest countries, since there is also private aid channelled by means of private organizations. Currently these sources of private aid constitute 10% of the official flows of aid and are growing at a sustained pace (unlike ODAs, which are more variable). However, geopolitical vicissitudes and local conditions in receiving countries may block the aid distribution channels and prevent the efficient management of the flows for years. Clearly, while conflict in developing countries stimulate the flow of humanitarian aid, it also hinders the official flows for development assistance, which deteriorates the situation of the poorest countries in the times of highest need.

Economic policyThe international coordination of economic policies is not an easy objective to achieve, though in Europe there is a trend towards homogenization thanks to the consolidation of the European Union, that could be establisher by means of a close coordination of policies or by the establishment of higher authorities to regulate certain areas, such as agricultural and monetary policies in the euro zone. The majority of the cases of international policy coordination occur among advanced countries (G8, OECD, etc.), while developing countries are more reluctant to such coordination due to a lack of adequate institutions or the lack of better opportunities to participate in the organizations that already exist. The participation of all countries in the international institutions as a function of their economic and strategic weight will be essential to the effective coordination of economic policies throughout the world, but the truth is that at the moment developed countries hold excessive sway in the main organizations devoted to this task. The alternative institutions, created to fit emerging and developing countries, have not worked well either, and as a result the development of this area of international relations has stalled.



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Technology and knowledgeThe current episode of globalization has resulted from the revolution of information and communication technologies. The social and economic consequences of this technological revolution are so big, that the use of the term “information society” has become widespread. This reflects the type of resource that is the most valuable today, which is the basis of the economic dominance of developed countries. The risk for developing countries to lag behind is real, which could exacerbate the “north-south” income distribution problems. The technological differences are as relevant as the economic differences. According to an estimate by the UNCTAD (United Nations Conference on Trade and Development) over 60% of the difference of incomes the Sub-Saharan Africa countries of and the industrialized countries has to do with differences in technological and knowledge capabilities. On the other hand, according to the United Nations barely in a decade the correlation between the income per capita and ICT density has increased.

At the same time, the flexibility and modularity of new technologies, whose services have become a widespread commodity due to their accessibility and affordability, allow developing countries to push their way past technological stages without having to go through the conventional technological cycles, an advantage that some countries have exploited with great success.


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ResourcesThe pressure on natural resources has increased considerably in the past few years due to the sustained growth of the world economy, which has intensified with the irruption of emerging countries, voracious consumers of energy and all sorts of raw materials. Oil prices reflect the global situation of raw material markets: they have experienced vertiginous hikes since US economy recovered deceleration from the 2001-2002, and by the end of 2007 their real term prices have come close to the levels reached during the oil crisis of the early 1980s.

Figure 3.3.13. Evolution of oil barrel prices. 1961-2006

Source: BP Statistical Review of World Energy 2007

The increasing trend of the price levels reflects the relative scarcity of the resources facing an excessive demand. But while the prices may be an imperfect measure of this scarcity, they also constitute an excellent regulatory mechanism in the market. Their high level allocates demand and stimulates supply, and above all, stimulates the supply of substitutes for the resources of rising price, as long as this rise has structural causes. Even more important is the role they play in stimulating the development of efficiency systems in the use of that resource, and the development of new technologies and substitute products, which in turn foster innovation and the creation of new markets and companies. Still, scarcity and turmoil surrounding available resources will be unavoidable in the upcoming years, which is why the power politics will characterise future scenarios in the international context.



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3.3.3. STABILITY AND EVOLUTIONOF THE GLOBAL VARIABLES

Generally speaking, the evolution of global variables follows a pattern of development lacking in disruptions or significant reversals. We ought to distinguish between economic and demographic variables, which are easy to quantify, and those of a social or political nature, whose nature is more qualitative. The trends they determine, while showing noticeable differences between large regions of the world, nevertheless display a pattern of sustained progress (with a faster or slower pace) peppered with periods of deceleration that, as noted above, do not tend to be pronounced.

Extreme situations in the variables under analysis are very rare and never happen spontaneously; they always result from exceedingly unsound and/or harsh policies (as was the case of the economic and demographic consequences of the industrial policy of the Maoist China in the late 1950s, or the fall of life expectancy in Eastern European countries immediately after the collapse of the Soviet regime). Also the combination of poverty and even poorer political and administrative practises (corruption and authoritarianism) may lead to regressions and recurrent crises of economic and humanitarian nature.

Generally, demography and the territory processes (urbanization) show a marked stability in their typical patterns, such as the increase of life expectancy, the decrease of fertility rates or the expansion of urbanization. A general trend towards the aging of the population, with an increase of the proportion of the population over 60 years of age, will be the norm in Europe, Asia and North America. Additionally, in the case of Europe demographic projections point at a decrease in the population between 15 and 59 years of age in the upcoming decades, though this evolution will depend in part on the success of the control of migratory flows into advanced countries, an issue that will be explored in the description of the three future scenarios.

Figure 3.3.14. Past evolution and future projections of population in Europe, Asia and Forth America by age group. 1950-2050.

Source: UNCTAD. Information Technology Report 2006.

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From an economic perspective, the worst crisis took place in the mid-1980s, and though it evolved into a long economic recession that affected advanced countries the most, it did not involve a noticeable decline in livings standards, let alone a disruption of the international economic order.

Developments of social character, for example, the evolution of lifestyles, have shown a pattern of convergence towards the styles practised in post-industrial societies, at least up to now. Although the rise of religious fundamentalisms may hamper progress in this area, the truth is that the globalization of the economy will accelerate this convergence, at least as far as consumer behaviours are concerned.

The political events tied to international economic coordination and the governance of international organizations are characterised by the protection of a status quo that no longer reflects the reality of the increasing economic and political weight of the great emerging countries or the developing countries. For this reason, the seams of the international cooperation system are subjected to an increasing pressure and will eventually burst unless international institutions undergo a substantial reform. Such a development, which has been prevented so far by the almost exclusionary rule over international institutions by the superpowers that emerged after World War II will be one of the features of the years to come.

Technology maintains one of its most relevant trends, that is, the accelerated rate at which is diversifies and integrates into every aspect of economic and social life. This evolution will not slacken its pace, but as it unfolds there is the risk that a strong technological gap will be formed between rich and poor countries, which takes its major expression in the so-called “digital divide”. In contrast, the developing countries capable of taking advantage of technology will be able to promote a rapid convergence with advanced countries easier.

On the other hand, environmental trends may reflect significant changes from this point, since sustainability problems have been accumulating while society’s awareness of environmental issues rose. The most palpable manifestation of these issues is the competition for available resources. The scarcity of resources and raw materials is not a recent development, and the volatility of their prices has been marked in the past, with important local consequences but relatively mild global impact. The new development is that scarcity tends to become structural as worldwide demand grows with the emergence of new superpowers with very large populations, like China or India, portending the gradual access of hundreds of millions of people to the consumption patterns of western societies.

To summarise, broadly speaking the global variables selected for scenario definition present relatively stable evolutions, with cyclical oscillations tied to economics, but overall stable structural trends towards progress. Many of these variables evolve in tune with the others, and extreme or diachronic episodes are very rare.


135

3.3.4. Global macroeconomic scenarios in 2016

The evolution of global dimensions and variables will determine the socioeconomic scenario faced by businesses in 2016. Following are the possible global scenarios for the next few years from the standpoint of developed countries. Three scenarios are described within the framework of the CEFFOR® methodological approach: a trend scenario exploring future possibilities under the assumption that the current global economic status quo is maintained; a negative scenario that describes a potential unfavourable evolution of the global context and thus a worsening of the economic and competitive environment of companies; and lastly a positive scenario that comprehends the innovation-driven opportunities that may be the basis for the near future. In the same manner, one the global scenarios corresponds to a sectorial scenario of the furniture industry, which will be presented in detail in this chapter.

3.3.4.1 Trend Scenario

The global trend scenario describes the socioeconomic context in 2016 based on the trends observed so far.

The global context in the trend scenario.

In 2016 the growth of the world population continues, with migratory tensions due to the existing inequalities in quality of life and life expectancy among countries. Likewise, there is a notable diversity in the households and lifestyles of different world regions, which present vast differences, though as economies grow household sizes tend to decrease and leisure and individual mobility take on greater significance in lifestyles. Urbanization is on the rise worldwide, which results sustainability problems and a clear gap between the rural and the urban worlds. As infrastructures develop, problems of congestion appear in population centres, and inequalities and environmental pressures are exacerbated. In this sense, there is a global awareness of the need to protect the environment, but the actual commitment is weak when it comes to taking action, and policies tend to be selective.

The world economy is characterised by a moderate expansion, always under cyclical parameters. Still, the convergence between developing and advanced countries is small. Controlling inflation in the main regions is a priority of the central banks, especially in the face of the permanent risk posed by the increasing prices of raw materials. In general, employment rates increase at a moderate pace, with a brisker pace in emerging countries with low salaries. The main macroeconomic aggregates are in equilibrium: interest rates are stable at the national level with a progressive improvement in the balance of payments and a relative stability in exchange rates.

Households worldwide are the main economic agents, through increasing levels of household debts and the growing development of banking systems. All of the above is made possible by the continuous advances and widespread application of information and communication technologies, though the lag of some economies in adopting these innovations threatens to place them on the other side of the digital divide. Consequent to these advances, public administrations experience moderate increases of their efficiency, as technology simplifies administrative procedures.Migratory tensions

due to the existing inequalities in quality of life and life expectancy among countries

Households worldwide are the main economic

agent, through increasing levels of

household debt

The world economy is characterised by a moderate expansion


138

In the political sphere, international organizations are dominated by developed countries. They function better and incorporate environmental and political regulations, which increase their capacity for intervention in humanitarian crises. There is an increased activity between international organizations and large corporations. Still, there is an increased degree of conditionality in international assistance on a case-by-case basis. As for economic policy, the profile of global regulatory agencies is limited, so there are no significant agreements at the global level, although the standards are generalised to all nations.

In international trade, though meeting with several obstacles, trade agreements progressively lift the barriers to conducting business, so world trading continues its path of sustained growth. In this context, the offshoring of processes to lower cost countries is commonplace, while the number of multinational corporations originally from emerging countries rises. At the domestic level, the main markets tend to be dominated by oligopolies. Capital flows are more selective and take fewer risks, which promotes the formation of financial poles in emerging countries. Given the global nature of business, the Corporate Social Responsibility is a growing concern of companies, though its progress is slow.

In general, the levels of governance are varied, and there are constant threats (international and regional conflicts), which offers a troubled view of the world at the global level. Development assistance is scarce, although private initiatives in this area are on the rise. The sustainability of resources is in question, and the context of overexploitation and scarcity leads to a search for alternatives, particularly in the field of energy efficiency. Advances in this area are difficult to transfer to other economies due to international agreements that are hardly binding.

The world trade continues its path of

sustained growth

In the political sphere, international organizations are dominated by developed countries

The levels of governance are varied, and there are

constant threats

The global context in the trend scenario: RETAIL BRAND


139

The context of high cost countries in the trend scenario

In high cost countries population growth has stalled due to the ageing of the population, rising life expectancies and difficulties in generational replacement. The pressures of immigration incorporate young individuals to societies, but not always in an organized manner (illegal migrants). New types of households diverge substantially from traditional family patterns decreasing their average, size. Changes in lifestyles take place slowly, and conventional styles coexist with newer ones based on contemporary social developments such as consumerism, technology, etc. The problem of urban congestion is handled with relative ease given the urban character of these societies. The rural world is an extension of the urban world, orbiting around it in harmony. Growth puts pressure on infrastructures and the use of alternatives to private transportation means is encouraged. There is an increased awareness of the value of natural resource, with a positive global effect, since it leads to more efficient systems for their production and use.

The economic context is characterized by a stabilisation period following the years of difficulties. Inflation is strictly controlled by central banks, particularly when it comes to the inflationary pressure of raw materials. Employment grows at a moderate rate in tune with the economic expansion, although wage levels remain under control. On the other hand, developed countries start to experience the consequences of the ageing population, which leads to higher budget deficits. Current account deficits are corrected in the balance of payments, but the risk of exchange rate oscillations remains.

Source: FMI.

The economic context is characterized by a stabilisation period following years of difficulties

Developed countries start to experience the consequences of the ageing population


140

The context of high cost countries in the trend scenario

Coincidence with the Retail Brand sectorial scenario:Given its significance as the framework for the furniture sector, the above scenario is associated to the sectorial trend sce-nario for the industry labelled Retail Brand, which will be presented later in this chapter.

In international context, global trade grows at a sustained pace despite the difficulties involved in liberalizing certain business transactions. Specifically, developed countries are reluctant to lower agricultural subsidies. Financial and fiscal coordination is implemented, and there are few institutional advances beyond the already existing agreements. Technological advances continue, with varying degrees of assimilation in different regions. Foreign investment is selective, with an emphasis on risk management and a moderate scarcity of international capital.

Consumers tend to adopt materialistic values, appreciating luxury items without renouncing new goods. The average household debt increases as the demand for services and leisure-based products (travel, film, computers, videogames …) increasses.

The business world is characterized by a higher level of consolidation and the growing accountability of the markets in terms of Corporate Social Responsibility, though few cases can provide an example of this. There is a constant focus on movements that attempt to curtail free competition in the face of business mergers and acquisitions, that happen often.

Public services are developed efficiently and are outsourced to a certain degree.

Institutions are generally stable in advanced countries, and United States dominates the international scene. Conventional approaches to development assistance are exhausted, and more private initiatives appear as a result.

The average household debt increases

United States dominates the international scene


141

3.3.4.2 Negative scenario

The negative global scenario describes the socioeconomic context in 2016 based on a drastic turn to the worse of the trends observed in the global variables up to this moment.

The global context in the negative scenario

In 2016 the world population grows uncontrollably, creating strong imbalances. The enormous inequalities in life expectancy generate powerful migratory pressures between underdeveloped and advanced countries, which are difficult to control. Consequently, there is a growing polarisation of the size and composition of households across the world, with clear extremes in the positive and the negative spectra. Lifestyles tend to diverge at increasingly high rates, with marked differences between the western world and other cultures, intolerance for difference grows, and multiethnic integration becomes more difficult. The urbanization of the large world capital cities has been a chaotic process leading to severe overcrowding problems. Concurrently, the rural world is experiencing difficulties to develop in a balanced manner. Advances in infrastructure occur at the expense of the environment, so ecological problems worsen, with no progress made towards their resolution in a climate of growing contradictions.

Worldwide economic growth is in crisis, as the differences among countries become more marked. The economy is characterized by receding markets, due to strong financial restrictions, a high inflation, rising unemployment rates and labour conflict. Households take the lead in the drop of private spending and the generalized impoverishment, and companies suffer a loss of profits, which entails a constant instability of the shareholders.

Public Administrations stop investing in modernisation, returning to past inefficiencies that place an increasing burden on their administrative systems. Public debt increases across the board, along with tax pressure. Underdeveloped countries suffer especially acute complications in their management, plagued by corruption. There is continuous imbalance in the balance of payment, and exchange rates remain unstable.

The world population grows uncontrollably, creating strong imbalances

Public debt grows in a generalized way along

with tax pressureWorldwide economic growth

is in crisis, as the differences among countries


142

The global context in the negative scenario: LOW CONSUMPTION

In the political arena, the importance of international organizations declines, even if the need for coordination rises. The discredit of international action grows due to conflicts between countries, which put the global organizations in a critical juncture due to their inability to resolve the lack of credibility and the unravelling of the economy. Rivalry among countries and global blocks of interests grows, hindering the global coordination of economic policies.

Technological advances appear disjointedly, without transferring from some economies to others, which fosters the emergence of monopolies in the markets and certainly a digital gap between the countries.

As for international trade, no agreements are made at a global level, as successive rounds of negotiation fail; this curtails liberalization and results in the divergent growth of different markets. Emerging countries maintain their cost advantages, encouraging the unchecked offshoring of manufacturing processes to underdeveloped countries, and generating dysfunctions and unsustainable competitive pressures of costs at the raw material markets. International investment is very selective and capital flows stream towards low risk options, collapsing the growth of emerging financial poles.

In general, the governance levels of countries are in question and in a state of permanent uncertainty. Development assistance is a failure and the millennium objectives against poverty and global inequalities have not been met. The exploitation of resources manifests the serious tensions that exist between demand and supply, which leads to volatile prices. There is no search for efficient energy alternatives and conflicts between countries proliferate, particularly in regard to renewable marine resources. Environmental solutions are implemented at the national level and there are no financial resources to improve sustainability at a global scale.

As for international tradeas successive rounds of negotiation fail

The importance of international organizations declines, even if the need for coordination rises

The governance levels of countries are in question

and in a state of permanent uncertainty


143

The context of high cost countries in the negative scenario

In high cost countries population growth has stalled, and the population is ageing, a phenomenon accompanied in some instances by an inability to cope with age-related disabilities and a decline of the living standards of seniors. Additionally, advanced countries are facing serious issues deriving from illegal immigration, which they will find difficult to control. Housing problems become dire, since there is no flexibility to accommodate new ways of habitation in response to arising needs (more single-person homes, senior housing, etc.). Since generational replacement is not taking place, conventional lifestyles based on traditional values continue to prevail. Urban centres manifest several dysfunctions, since they have developed without proper planning, and rural areas are structured in an unsustainable way (poor resource management, congested infrastructures, etc.) There is local progress towards environmental protection, but not at the global or even national scale.

The economic framework is characterized by the enormous challenges faced by advanced industries to resume growth after the severe recession that started in year 2008, as the negative economic cycle does not quite come to an end. Inflation levels are high, despite of the efforts of central banks, and employment stops growing. Budget deficits increase of developed countries due to a lack of consensus on the structural measures to be applied to address the crisis. Furthermore, imbalances of the BOPs become the norm and there are strong oscillations in exchange rates, contributing to the general uncertainty. Under such circumstances, there is a propagation of economic nationalism and protectionism in favour of domestic industries.

In the international sphere, the crisis of mature manufacturing sectors (textiles, furniture, footwear, etc.) intensifies, with recurrent antidumping conflicts, the service sector hardly progresses in the international market. Foreign investment withers and investors avoid risk-taking given credit limitations and elevated interest rates. Imports of goods and services in developed countries are only of products of lower price and quality, fostering low cost markets with low levels of differentiation.

Source: FMI

The economic framework is characterized by the enormous challenges faced by advanced

industries to resume growth after the severe recession that started

in year 2008


144

The context of high cost countries in the negative scenario

Spending becomes reckless in developed countries, with increasing household debts and a lack of concern for the future. The growing mobility of individuals (through travel, relocation, etc.) generates sustainability problems.

Business sectors suffer the consequences of excessive consolidation, which reinforces barriers to entry and reduces the dynamism of markets. The commitment of corporations to society and the environment stall, and programs of Corporate Social Responsibility are few and limited. The complicated competitive context leads to a trend of outsourcing to the least developed and lowest cost countries.

On their part, Public Administrations are burdened with intensive regulatory policies, which encumber business transactions and lowers the confidence of agents, who see their indirect costs grow (bureaucracy, permits, etc.).

International organizations are paralysed and unable to resolve old conflicts that have become entrenched. The European Union is not progressing and the United States closes up in search of domestic solutions. Economic policies in high cost regions are not coordinated and they are designed from a highly defensive stance in response to the temporary conditions of the market. Technology develops in monopolies, giving rise to an elite of technological countries increasingly distanced from the rest. All of the above prevents the leadership of the advanced economies from meeting the social and economic objectives of development assistance for poor countries.

Coincidence with the Low Consumption global scenario:Given its significance as the framework for the furniture sector, the above scenario is associated to the negative sectorial scenario for the latter industry, labelled Low Consumption and explained later in the chapter.

Spending becomes reckless in developed countries, with

increasing household debts and a lack for concern for the future

International organizations are paralysed


145

The population is growing at a balanced rate

The economic context encourages private investment

and the undertaking of new business ventures

Household spending is dynamic, the overall

financial situation is stable, and taxes are lower

3.3.4.3 Positive scenario

The positive global scenario describes the socioeconomic context in 2016 on the basis of a favourable evolution of the global variables, anticipating a drastic trend towards innovation and the improvement of worldwide socioeconomic circumstances. This scenario involves the frequent adoption of proactive stances that condition the behaviour of the agents towards the objective of creating a better future, at times against the trends that had prevailed up to that point.

The global context in the positive scenario

In 2016, the population is growing at a balanced rate, with life expectancies rising across the globe, which softens migratory pressures between countries. There is a wide diversity of households, adjusted to the realities of each country, resulting from the flexibility and freedom of individuals. Likewise, numerous lifestyles coexist without conflicts in an atmosphere of tolerance and acceptance of differences. Urbanization occurs at a controlled pace and rural environment is structured in tune with urban growth. Also, the progressive development of infrastructures in the world is based on rational and sustainable criteria, with a more efficient use of space. Ecological problems are addressed with ambitious international agreements backed by mechanisms that function correctly and generate benefits at a local level.

Within this period of sustained expansion, emerging countries lead the potential for global growth, driving the convergence of the different world regions. Inflation is contained thanks to the increase of productivity and advances of alternative energy technologies. Employment grows in a generalized fashion, with raises in real wages. Household spending is dynamic, the overall financial situation is stable, and taxes are lower.

This state of affairs in the economic context encourages private investment and the undertaking of new business ventures, taking advantage of the opportunities offered by the markets. The use of information and communication technologies is massive and widespread. Corporate Social Responsibility progresses, as it is adopted by an increasing number of companies. Public Administrations evolve to higher degrees of decentralisation, in part because of the spread of electronic management and declining levels of corruption. The main macroeconomic equilibrium are stable and favourable to the economies: lower budget deficits, stabilized balance of payments and steady exchange rates.


146

The global context in the positive scenario: SMART SOLUTIONS

The levels of governance of all countries converge towards

stable positions committed to the welfare of societies

The international organizations are backed strongly by the member countries

The global agreements are reached following successful

negotiation rounds

At the political level, international organizations are backed strongly by the member states, reinforcing their effectiveness and their ability to intervene in various issues. Multinational corporations grow, as well as private charity initiatives that renew the traditional formulas of the NGOs. There is trust in the world organizations and optimism that conflicts can be resolved by the election of leaders that have won their authority by merit, not by political lobbying. There are solid advances in the matter of coordinating economic, financial and fiscal policies.

Technological advances succeed one another and the technological revolution unfolds to the benefit of every region of the world. As its advantages are spread across the globe, there is a worldwide convergence towards knowledge economy. Developing countries are quick to assimilate into the technological evolution, burning through outdated stages and thus positioning themselves close to advanced countries.

In terms of international trade, global agreements are reached following successful negotiation rounds, which launches a new age of world trade prosperity based on the parity of conditions for competition, so the differences in costs between countries are mitigated. There is a stable framework for investment and property rights, with a constant flow of capitals due to adequate risk management and a wider range of investment opportunities in the world. As a consequence, new international financial poles develop. Offshoring takes place in a balanced manner, as efficiency is pursued without causing a negative impact on the industries of origin, since there is a higher competitiveness in the domestic markets.

The levels of governance of all countries converge towards stable positions committed to the welfare of societies, reinforced by global treaties. Isolated problems are approached through development assistance, with better practices and the acceptance of intervention into domestic affairs. In the environmental front, the exploitation of resources is managed efficiently, controlling the risks of scarcity, and global cooperation is at work to find solutions to the world’s problems. The interest in sustainability spreads through the world and permeates the lifestyles of individuals and the actions of organizations, rationing the use of unrenewable resources and researching the creation of renewable alternatives.


147

The context of high cost countries in the positive scenario

Advanced countries manifest a healthy demographic dynamism, with population ageing counteracted by the organized entry of immigrants. Additionally, life expectancy grows harmoniously along with living standards, decreasing the challenges of disability in the senior population. The evolution of households has taken place in a tolerant and open manner, and there is a wide diversity in the composition and size of the households and the relationships between their members. The strong generational replacement involves the adoption of modern lifestyles, with strong materialistic components, to the detriment of more traditional styles. Urban development is sustainable and accompanied with improvements of the quality of life of rural areas. Polycentric metropolitan areas proliferate, so that several cities hold the economic and social leadership at local level. Infrastructures have been redesigned into sustainable forms and information and communication technologies have expanded vertiginously through the advanced countries. Environmental awareness is widespread, and the necessary resources exist to implement improvements, facilitating the reusing and recycling of materials.

The economic context is characterized by the reactivation of developed economies, with the recuperation of the United States and an accelerated rate of growth in the countries of the European Union. Inflation is contained at moderate levels thanks to advances in productivity and energy technologies. Full employment levels are reached, by a postponement of the retirement age and the entry of skilled migrants. Budget deficits are within acceptable levels and structural measures are adopted to alleviate the effects of ageing societies. The BPOs of advanced countries are stabilized and steady exchange rates contribute to a higher level of confidence.

Source: IMF.

The economic context is characterized by the reactivation of developed economies, with the recuperation of the United States and an accelerated rate of growth in the countries of the European Union


148

T

The context of high cost countries in the positive scenario

World trade experiences a strong impulse, particularly in the service sector, and the potential for growth stimulates international investments. Specifically, developed countries reduce their subsidies in the agricultural sector. The generalized liquidity of companies allows them to assume higher risks, so capital flows between countries are less selective. Offshoring to emerging countries occurs in a controlled manner, so there is not incentive for radical processes; developed countries have succeeded to imposing quality and sustainability standards to the emerging producers, so the cost difference narrows.

The solvency of consumers allows them to act responsibly, and they are ready to pay for consuming environmentally sound and sustainable products. Consequently, the mobility of individuals takes on less polluting forms (public transportation, trip optimisation, etc.)

The business world is characterized by responsible consolidation (without loss of employment or the unreasonable exploitation of resources) and better competitive practices. The image of corporations is crucial, so programmes of Corporate Social Responsibility abound, returning benefits to the society. Legislation to regulate mergers and acquisitions progresses, and efficient anti-monopoly policies are put in place. Generally, opportunities for companies abound in the markets.

Cooperation among developed regions is the norm, with foreseeable agreements based on compromising, particularly between the European Union and the United States. This has important repercussions, particularly when it comes to economic policies, since countries are willing to observe new common authorities devoted to financial and fiscal coordination. The right to intervene in foreign conflicts with the purpose of seeking solutions is accepted. This is particularly relevant in development assistance, since advanced countries foster new forms of aid, along with initiatives that combine public and private actions. In the area of technology, advanced countries are the leaders in knowledge, which allows them to contribute to the advancement of all other nations.

Coincidence with the sectorial scenario Smart Solutions: Due to its importance as the framework for the furniture sector, the scenario just described is associated to the positive sectorial scenario for the furniture business entitled Smart Solutions, which will be presented later in this chapter.

World tradeexperiences a strong momentum, particularly in the service sector

The cooperation among developed regions is the norm, with foreseeable agreements based on compromising


149

3.4. The PREDICS® for the sectorial scenario definitions of the furniture industry.

The definition of sectorial scenarios of the furniture industry must answer the fundamental CEFFOR® question: What are the critical aspects that will determine the future competitiveness of the furniture manufacturing companies in high cost countries in 2016?

To answer this question, in 2005 AIDIMA started a process in which experts (firms and sectorial agents such as associations, research centres, universities…) from different countries participated in a series of debates reflecting on sectorial strategies, which confirmed that the effects of globalization on the furniture manufacturers are similar in high cost regions worldwide. The USA was the first country where the effects of globalization were perceived by the furniture sector. The result was an initial list of over eighty key variables of competitiveness which, far from clarifying the extent of the problem, evinced the complexities that the industry is facing in the remaining high cost countries.

Therefore, it was necessary to synthesise the critical variables for the industry in a fundamental model capable of approaching the complexity of the problem from an integral perspective and at the same time facilitating the understanding of the issue.

Since there was no specific model existing for the furniture industry, a model, meeting the following requirements, was created under the name PREDICS®: • A model capable of establishing criteria to select and classify global and sectorial information, establishing a common language for the sector.

• An integral model that takes into consideration the key factors for the future scenarios of the furniture industry, without losing sight of fundamental macroeconomic and social issues.

• An interdisciplinary model capable of responding from various perspectives to the challenges of the competitiveness faced by the furniture manufacturer.

• A simple model, intuitive and easy to understand, reached after a repeated process of reflection and consolidation of the key variables into groups of strategic factors for the furniture manufacturing firm.

The PREDICS® Model

· Uses the language of the industry.

· Is integral (macroeconomic and sectorial).

· An interdisciplinary model.

· Simple and intuitive.


150

3.4.1. THE CONSTRUCTION OF THE PREDICS® MODEL

The PREDICS® model identifies the dimensions whose evolution will shape the competitiveness of the furniture industry in high cost countries in a 2016 time horizon. Each of the PREDICS® dimensions comprehends a series of variables selected by their degree of importance to the furniture manufacturer, on which the industry has little influence and with evolutions characterized by a high level of uncertainty. In this manner, the model makes it possible to circumscribe the nature of the problem for the industry in the next few years and to describe it in terms of seven dimensions. These dimensions are represented by letters, all of them is derived from the name of the corresponding dimension in English and which combine to form the acronym PREDICS®. The acronym PREDICS® helps the easy recall of the dimensions that will define the future scenarios of the furniture manufacturing industry, which are:

1. Political International Situation.

2. Strategies of the Retailers.

3. Evolution of Economic Variables.

4. Evolution of Demographic variables.

5. Level of International competition.

6. Attitudes and Behaviour of the Consumer.

7. Evolution of Social variables and House Implications.

Source: AIDIMA.

Figure 3.4.1. PREDICS® Model for the sectorial analysis of the furniture industry.


151

Each dimension of the model includes a series of components or variables, up to a total of 32 variables crucial to the future of the furniture industry.

Sour

ce: A

IDIM

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In the future, each variable of the model will take one specific value from a range of possibilities. The foresight analysis becomes complex to the degree that all the values that may be taken by a variable need to be studied, going from the current state of the variable to alternative situations and even to extremes of drastic disruptions of the variable. The totality of every possible combination of these variables generates the so-called ‘morphological space’, that is, the space of all the possible futures of the furniture industry defined on the basis of the evolutions of each variable (109 possible configurations were considered).

The next step was to ‘reduce’ this morphological space to a more tractable form by assigning probabilities of actualisation to each combination and removing illogical, implausible and improbable combinations. To do this, techniques of foresight analysis were used to carry out a morphological analysis of each dimension, that inconsistent or illogical combinations of the particular dimension were eliminated, thus defining a new space of futures that was easier to understand for users unacquainted with the research methodology.

The result of this process (in which the FAR Technique—Field Anomaly Relaxation—was applied) was the generation of a matrix that reflects the seven dimensions of PREDICS®

and the three most probable combinations in each of them. This matrix became the basis of a new morphological analysis consisting of the possible combinations of the elements of this matrix (to a total of 2,187, from combining three possibilities in each dimension: 3x3x3x3x3x3x3).

This matrix is the basis of the subsequent definition of sectorial scenarios. The matrix synthesizes the key dimensions that will influence the competitiveness of the furniture manufacturer, focuses on those variables that have the highest levels of uncertainty and over which the industry has the least control, and summarises the most probable outcomes for the upcoming years giving rise to the future competitive scenarios. Using the matrix and the definitions of the global social and macroeconomic scenarios, experts acquainted with the competitive environment of the furniture sector worldwide have evaluated the likelihood of the occurrence of each cell in the matrix. The result has been the definition of three sectorial scenarios for the furniture industry in high cost countries.

Table 3.4.1. Matrix of possible outcomes for each PREDICS® dimension.

International politicalsituation

Strategies ofthe Retailers

Unlimitedoffshoring

Concentrated furnituredistribution channels

Selectiveoffshoring

Cooperation betweenfurniture distributors

P1. R1.

P2. R2.

Offshoring ispointless

Fragmented furnituredistribution channels

P3. R3.

Evolution ofdemographicvariables

Furniture for anageingpopulation

Furniture for abalancedpopulation

D1.

D2.

Furniture for arejuvenatedpopulation

D3.

Level of internationalcompetition

Furniture from LCCvery competitive

Competitiveadvantages evenlybalanced

I1.

I2.

Furniture from LCCuncompetitive

I3.

Consumer attitudes andbehaviour

Conventionalbuying of furniture

Advanced buyingof furniture

C1.

C2.

Innovative buyingof furniture

C3.

Evolution of socialvariables and theirimplications in thehome

Conventionalhomes

Advanced homes

S1.

S2.

Innovative homesS3.

Evolution ofeconomicvariables

Decline offurnitureconsumption

Stagnation offurnitureconsumption

E1.

E2.

Increase offurnitureconsumption

E3.


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3.4.2. PREDICS® AS THE BRIDGE BETWEEN SOCIOECONOMIC SCENARIOS AND SECTORIAL SCENARIOS

The dimensions of PREDICS® make possible an analysis of the future evolution of the furniture industry without losing sight of key global socioeconomic issues. Therefore, PREDICS® is a “bridge” between the global economic scenarios and the sectorial scenarios which allows an assessment of the direct effects of the global environment on the furniture industry. This linkage or “translation” of effects between the global and sectorial levels is performed on the basis of two basic criteria employed by the panel of experts of CEFFOR® to evaluate the probability of each combination of the PREDICS® dimensions:

• First, by assessing whether each global variable has a potential effect on the furniture sector, or on the contrary, its impact on the industry is insignificant or nonexistent. For example, whether the generalized discredit of international organizations would have any kind of impact to the furniture sector by resulting in the failure to reach regulatory agreements at the international component market.

• Second, by deciding whether a positive (or negative) development of a global variable from the socioeconomic scenario could be translated into a negative (or positive) impact to the furniture sector. For example, whether a total failure of the Doha Development Round of the World Trade Organization (a clear component of a negative global scenario) could have a favourable impact in the furniture sctor, thus becoming a component of a positive sectorial scenario.

Figure 3.4.3. The PREDICS® model as a bridge between global and sectorial scenarios.


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With the purpose of assessing the relationships between the global variables of the socioeconomic scenarios and the different dimensions of the PREDICS® model, an impact matrix was designed which evaluates the intensity of the existing relationships. The more saturated the colour of the corresponding cell is, the more intense the correlation is between the pairs. Additionally, the intensity of its correlation is assigned by a numerical value so operational conclusions can be achieved about the impacts of the global scenarios on the sectorial scenarios.

Figure 3.4.4. Relationships between the global variables and the PREDICS® dimensions.

Internationalpoliticalsituation

Strategiesof theRetailers

Evolution ofdemographicvariables

Level ofinternationalcompetition

Consumer attitudesand behaviour

Evolution of socialvariables and theirimplications in thehome

Evolution ofeconomic variables

PREDICS CONFIGURATIONS FOR THE ENVIRONMENT OF THE FURNITURE INDUSTRY

DEMOGRAPHY

TERRITORY

AGENTS

MACROECONOMICEQUILIBRIA

MARKETEQUILIBRIA

GLOBALRELATIONS

PopulationHouseholdsAttitudes and Lifestyles

UrbanisationInfrastructuresEnvironment

ConsumersCompaniesPublic Admins.Internat. Organisations

GrowthInflationEmploymentBudgetary BalanceCurrent Account

CompetitionInternational TradeCapital Markets

GovernanceCoop. and DevtEconomic PolicyTechnology & KnowledgeResources

Non-existent or negligible relationship between the global dimension and the corresponding PREDICS configuration for the environment of the furniture industry.

Some relationship between the global dimension and the corresponding PREDICS configuration for the environment of the furniture industry.

Clear relationship between the global dimension and the corresponding PREDICS configuration for the environment of the furniture industry.

Strong relationship between the global dimension and the corresponding PREDICS configuration for the environment of the furniture industry.


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Based on the numerical data it is easy to discern that the global variables determine the general environment of the furniture sector. The global dimensions that have the most influence on the furniture business are “Market equilibrium” and “Global relations”, since they affect the evolution of the PREDICS® dimensions “P” and “I”, that is, the “Political situation internationally” (represented by the offshoring strategies of the companies of the sector) and the “International competition” (represented by the relative advantage of high cost countries).

On the other hand, the evolution of the PREDICS® dimensions most affected by the global variables are “P”, “C” and “S”, that is, the “Political situation internationally”, the “Consumer behaviour” and the “Social evolution of home attitudes”. These impacts come from the global variables that belong to the “Demography”, “Market Equilibrium” and “Global relations” global dimensions”. Furthermore, it is observed that all global dimensions are particularly relevant to the “C” dimension of PREDICS®.

The impact assessment of global variables on the dimensions of the furniture sector contributes to a better definition of the sectorial scenarios of the industry in 2016, since it offers a coherent landscape of the environment of the furniture manufacturing enterprises and the critical variables of their competitiveness.


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3.5. SECTORIAL SCENARIOS OF THE FURNITURE INDUSTRY IN 2016

3.5.1. KEYS TO INTERPRET THE SCENARIOS

Following is a presentation of the three possible scenarios in which the furniture manufacturing business will have to compete in 2016. Each scenario has been defined as a function of its specific global and sectorial characteristics, in contrast with the development of the sector in the remaining scenarios. Therefore, these scenarios are mutually exclusive. Although the scenarios may share some features (for instance, all of them will assume a certain degree of furniture distribution), the intensity and effect of the events will be definitely different in each.

On the other hand, a correct interpretation of the scenarios demands the awareness that the description of each futurable is based on predominant cases, which does not prevent the existence of a minority of cases with behaviours or outcomes that deviate from the description. In fact, and particularly in the description of the evolution of demand and consumer behaviour, the scenario depicts the evolution of the majority, which is not to say that alternative minorities are not compatible with each scenario.

The description of the scenarios that the furniture industry may face in 2016 follows a common construction that ranges from the definition of demand in each scenario to the political and economic framework of the industry, including patterns in distribution channels. Thus, each scenario is presented according to a specific structure that follows a pattern based on the PREDICS® dimensions:

a. Consumer characteristics.

b. Prevailing value proposition in the scenario.

c. Characteristics of distribution channels and of customer/business relations.

d. Influence of the political and economic environment in the scenario.

e. Main players.

To start, before going into the potential evolution of the furniture industry it is necessary to know the needs and characteristics of households and their members in the upcoming years. In this way, consumption and its associated variables (the evolution of social values, spending habits, user needs, etc.) lay dawn the foundation for the development of each scenario definition. In the years to come, there will be an increased interest in the figure of the consumer, which will bring forth significant changes in the business practices of the furniture manufacturer, who will be facing a production and retailing context completely different from the one that has existed for decades. For this reason, the description of each scenario should start with the presentation of the characteristics of the demand side, the consumer types that will exist in each scenario, and the predominant values, since all of the above will have to be the cornerstone of the value proposition of the furniture manufacturer in each scenario in order to meet the needs of the demand side.

Secondly, it is necessary to understand the way that distribution will be organized and shape the furniture market. Similarly, each scenario will establish a series of relationships between demand and supply, formulated according to particular tools that require specialized knowledge.

After this follows the description of the sectorial context where the firms will operate, and the scenario then closes with an analysis of the critical players whose strategies will determine the relationships and actions of the agents in the furniture sector.


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3.5.2. THE DRIVERS OF CHANGE

The three scenarios presented are different, assuming different evolutions in the sectorial dimensions. Nevertheless, the results of the first round of consultations with CEFFOR® experts established that there are specific areas that will follow a common path in all the three scenarios, constituting a single axis around which future possibilities will unfold. This axis of the evolution of the furniture sector has the following features:

• The evolution of consumption

• The consolidation in distribution channels

• Improved efficiency in emerging countries

• Selective offshore outsourcing

3.5.2.1 The evolution of consumption

The evolution of the demand side will be crucial in the following years, since it will determine the market opportunities available to manufacturers. In each scenario, the consumers will present a different demand of value and will interact differently with the companies, which leads us to state that each scenario will have a predominant demand value on the part of the consumer. Understanding what the demand of value will be in each scenario is a fundamental step for the subsequent implementation of business strategies.

The evolution of consumption is comprehended by the D, C, S and E PREDICS® dimensions, encompassing a range of options from conventional spending and use habits in home furnishings, to more advanced and even innovative ones. In turn, all of this is associated to the dynamism of the furniture market, which may grow or decline in the future, a development that will be shaped in part by the demographic situation observed in each scenario.

Figure 3.5.1. Future trends in the furniture sector: PREDICS® dimensions and scenarios.

Source: Results from the First Round of CEFFOR® Experts. 2007.

Ageing population

InnovativeScenario

TrendScenario

DisruptionScenario

Selective offshoring

Increased efficiency in LCC

Innovativebuying experience

Innovativebuying process

Innovative habitat

Increase of consumption.

Disposable incom

e positions

Rejuvenated population

Unlim

itedoffshoring

Concentration of distribution

Advanced

buying processC

onventionalbuying process

Conventional habitat

Decline in

consumption

D.I. positions


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3.5.2.2 Consolidation in distribution channels

The trend towards consolidation in furniture retailers is an observable fact in the leading advanced countries. Years ago, as a continuation of the trend in home furnishings and appliances towards distribution through major retail outlets, traditional furniture stores started to associate in a variety of ways, mostly by forming franchises, store chains and group purchasing organizations. All of it is motivated by the unquestionable economies of scale enjoyed by retailers as they increase of size, most important of which is gaining access to the world market of suppliers of furniture and components, resulting in lower costs.

This trend will continue in all three of the presented scenarios, although its effects will be different depending on the higher or lower intensity of this trend as a product of the remaining variables in the sector, and particularly of the evolution of consumption. In the best-case scenario, the evolution of distribution will incorporate innovations from other consumption sectors, in contrast with the traditional model of the store, which is less dynamic and relies on the personal interaction between seller and buyer and is exclusively focused on sales.

3.5.2.3 Improved efficiency in emerging countries

The development of low cost countries, with China at the forefront, is an irreversible process. According to the generalized opinion of the international expert panel of CEFFOR®, the situation of the furniture sector notwithstanding, the competitiveness of industries in emerging countries will increase, which will intensify the international competition level for manufacturers in high cost countries. As a result, the pressure to lower costs will continue to be a threat to the furniture manufacturer, and the need to improve productivity will be a daily challenge. Furthermore, the process will quicken its pace due to the increasing consolidation of retailers, which will change the dynamics of the world furniture market. In a world where there is always a cheaper competitor, efficiency will be a must, but it will not be enough to succeed in the markets nor to sustain a competitive advantage.

3.5.2.4 Selective offshore outsourcing

The existence of countries with favourable production conditions (lower wages, administrative advantages, newer infrastructures, national subsidies for specific locations, etc.) will result in at least a minimum level of production outsourcing to these economies. In every scenario, companies will find productive incentives to base some of their processes in emerging countries, or replace domestic production with direct purchases abroad. Still, only a negative disruption scenario with an absolute lack of control over the worldwide market conditions would result in unchecked offshore outsourcing. Rather, the search for productive sites across the globe will take place in a selective manner, always taking into account the conditions in the receiving country, and it is fairly likely that some countries will succeed others as receivers of foreign investment, which will foster the continuous selective search of new locations.


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Sectorial scenarios of the furniture industry in 2016

Retail BrandSectorial scenario of the furniture industry in 2016

Retail Brand is defined by being a continuation

in 2016 of the structural characteristics of the

market and the competitive environment in

which furniture manufacturers currently find

themselves.

This scenario is therefore trend-based

in character and takes account of the

consequences and implications of the

furniture sector in high cost countries evolving

in accordance with the trend observable up

till now.

3.5.3. THE RETAIL BRAND SCENARIO

3.5.3.1 Key features of the Retail Brand scenario

Congestion

Tension

Controlled debt

Cyclical growth

Slow recovery

Search for a new order

Difficulties in the creation of young households

Light increase of furniture consumption

Home as refuge

Transaction

Pressures of cost competition

Selective offshoring


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Retail Brand Scenario

One of its main characteristics is the consolidation of furniture retailers around large international distribution firms, purchasing from suppliers in the global market and with presence at numerous national markets. In this situation, the furniture manufacturing company faces difficulties to have its supply be known and accessible to the consumer, aspects that are left in the hands of the large retailer (thus the name of this scenario: Retail Brand implies that the consumer is only familiar with the brand name of the retailer, rather than the manufacturer’s).

Depending on the price range targeted by the manufacturer, it can function in the market either as a supplier (if it operates in the low-end market, which is controlled by large retailers that get better prices in developing countries, where the industry offers significant cost advantages) or by collaborating with an independent distributor established in the middle or high end market (which offers the manufacturer contacts with retail outlets and contributes to improved marketing mixes, etc.). In a minority of cases, the middle or high end manufacturer integrates forward, controlling its own distribution system by means of self-owned stores or franchises, becoming a manutailer (manufacturer and retailer at the same time).

The scenario takes into consideration the evolution of the global variables, which are characterised by slow economic development, in accordance with the economic cycle. The social aspects are characterised mainly by slow population growth and difficulties in controlling immigration, accompanied by ageing of the population.


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Key features of the Retail Brand

Table 3.5.1. Key features of the Retail Brand.


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3.5.3.2 The consumer in the Retail Brand scenario

In 2016, the consumer faces a stagnant furniture supply that cannot inspire enthusiasm, despite the existence of latent needs that few companies are capable of addressing. The supply is generic, and hardly distinguishes between the different groups of consumers, which seriously stunts the development of the industry. The manufacturer designs its production to target large segments of the public by the price and style of the product. The input of consumers is limited, since little is known about the end-user beyond basic socio-demographic variables (buyer’s age, number of members in the household, etc.) while a significant portion of the market is dominated by leading corporations that address the consumer according to his lifestyle: Traditional (preservation of past values and scepticism towards the advances of society), integrative (contemporary, with a strong technological component, with an image of social awareness and modernity, with an emphasis on self-fulfilment), consumerist (which demands simple and fashionable furnishings at affordable prices) and a basic lifestyle (seeking the lowest possible price). Furthermore, furniture is susceptible to the prevailing trends of the different age groups, whose values are assumed in part by the manufacturer and in part by the retailer insofar as the economic situation allows to pay a higher price for the product.

Given the gradual ageing of the population, the markets in the Retail Brand scenario focus on the adult segments of the population, paying particular attention to the first generation of women to achieve social recognition for their professional merits, and the male segment of the population that demands luxury items. Still, the economic conditions of the Retail Brand scenario prevent these markets from reaching more than half the population.

Table 3.5.2. Advanced furniture purchases in 2016.

The first generation of women to achieve social recognition for their professional merits

The consumer faces a stagnant furniture supply that cannot inspire enthusiasm



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The consumer of furniture is influenced by demographic variables as well. The world population has reached 7.3 billion people, although the growth rate has declined in the past few years to 1.04%, which is 0.12 % below the growth rate of the decade before. The ageing of the population is manifest, particularly in working-age adults and seniors older than 80 years. Migratory tensions have relented little, and the number of immigrants has grown to 225 million worldwide, 35 millions more than ten years before. Therefore, controlled immigration and the ageing of the population are the two demographic aspects that have the largest social repercussions in developed countries.

In Spain there is a great diversity in the configuration of households, from the conventional nuclear family to other forms, such as extended families in which several generations coexist or extended domestic groups that live with other family members, and a significant increase of the number of one-person households. Spanish households have evolved towards European models, becoming smaller and simpler. In relative terms, the proportion of households consisting of childless couples, single parent households or one person households has increased, weight of households consisting of childless couples has increased, as the traditional nuclear family is experiencing a decline. The number of one person households has risen strongly in the last few years, due to separations and divorces as well as to a new concept of the couple. In the 1970-2001 period one person households experienced an increase of about 340%, going from a small 7.5% of total households in 1970 to a 20.3% thirty years later.

Figure 3.5.2. World population pyramid: 2007-2015.

Source: US Census Bureau.

In 2016, the world population has reached 7.3 billion peoples, with unchecked immigration and the ageing of the population

In 2016, in Spain there is a great diversity in the configuration of households, and a

significant increase of the number of one-person households


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Spain

USA

CHINA

BRAZIL

CANADA

WESTERN EUROPE

INDIA

MEXICO



169

The nuclear family consists of few members (usually a father, a mother and one child). Children experience difficulties when they try to leave the parental home, and emancipation eventually takes place at a higher economic cost and mature age (at 30 years or older). In the meantime, they live with their parents and have a different lifestyle from the latter’s.

On the other hand, as a result of a higher life expectancy and the ageing of the population, there is a significant number of one person households where the member is of an older age, which generates a segment of consumers with special needs that are not being met adequately by the furniture industry.

Last of all, in the case of immigrants, which result from uncontrolled migratory patterns and an unplanned household development, the prevailing household type is that of the extended family, characterized by the cohabitation of different family members or even other people not related by blood.

Generally speaking, the purchasing power of households has increased due to cheap credit options, though there has been a subtle trend towards increasing interest rates in the past few years. Despite the increase of household debt, resulting from a greater tendency to consume, the disposable income of households allows a certain dynamism in the markets at given points, though in general the furniture industry is stagnant. Conversely, households have increased in mobility and they tend to consume more leisure products as transportation costs dropped. Thus, sectors other than the furniture industry are absorbing part of the income available for households (for instance, the flow of international tourism goes up to 1.33 billion in 2016, compared to 846 million in 2006, according to the UNWTO (United Nations World Tourism Organization).

Figure 3.5.3. Past evolution and distribution of the population by Household Life Cycle stage in Spain in 2015.

Source: Department of Commercialization and Market Research.School of Economy. University of Valencia.

There is a significant number of one person households where the member is of an older age

The disposable income of households allows certain dynamism of the markets at given points, though in general the furniture industry is stagnant


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As for housing, it has evolved little in the past few years, and in 2016 it continues to offer the conventional values of security, rest, refuge and storage space. Nevertheless, there is a certain search for sustainability in the field of urban planning, optimizing the available sources of energy. Meanwhile, despite technological advances, ordinary housing units hardly ever incorporate domotic technologies. In addition to the fulfilment of daily activities, a new need has become generalized: that homes provide the quiet and isolation required for people to relax, so rooms and products designed for resting and refuelling the individual are on the rise. Also, in 2016 there are some forms of housing that incorporate some advances, which are not substantial innovations. Along with conventional housing, there are other constructions of an advanced nature that incorporate new concepts which in part translate into different furnishing offers.

3.5.3. Characteristics of the most innovative home in 2016 in the Retail Brand scenario.

In 2016 there are some forms of housing, that incorporate some advances, which are not substantial innovations



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3.5.3.3 Consumer value in the Retail Brand scenario.

A piece of furniture is valued by its design, shape, appearance and the degree of novelty offer to the consumer according to the current trends, and it is always assessed in terms of its price. The physical product is still the heart of the offer, although it is complemented by the traditional services that tend to accompany it, such as financing, delivery, assembly, etc. In particular, the customer has a growing interest in value-added offers such as decoration consultation or furniture project design. In this manner, the worth of the piece of furniture resides in its functional aspects (quality, finish, etc.) while its style (design, shape, appearance) contributes an emotional “extra”. As for new attitudes, ecological values have been incorporated into the basic definition of the product, so buyers take them for granted. Altogether, furniture is not an exceedingly attractive product for the consumer in comparison to other durable goods (vehicles, consumer electronics, etc.) so it is not a priority in the budget decisions of families unless it is a necessary purchase. Thus, the home furnishing market experiences little turnover and long usage cycles. In terms of price ranges, a significant share of the market is controlled by low price products, while the share of differentiated furniture is divided between the middle to high price products.

Figure 3.5.4. Structure of the furniture market by price range. Retail Brand scenario.

The physical product is still the heart of the offer, although it is complemented by the traditional services that tend to accompany it, such as financing, delivery, assembly, etc.

Escenario Retail Brand

Source: CEFFOR®


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3.5.3.4 Distribution in the Retail Brand scenario

Although the consumer is used to sectors that are more dynamic, he does not find attractive offers at the furniture market relative to other products at the time of purchase. As a result, the consumer becomes an occasional buyer, focused on a specific purchase as the need arises, but with no interest in establishing a lasting relationship with the sales point. Once the buying process has started, the participation of the consumer centres on the definition by means of virtual tools of a decoration project and the selection of the finish of the furniture from a range of predetermined choices. Thus, the points of contact with the consumer are limited to the time of purchase and the post-sale eventualities that may come up. Consequently, the consumer tends not to be a regular buyer in a given POS.

The distribution of furniture is concentrated to the physical area, and the sales point is the critical space in the interaction with the consumer. Retailers may have a presence in the Internet, but this channel has little significance in sales volume or in enhancing the relationship with the consumer: its role is mostly informational. Furniture stores are physical and designed more as an exhibition space than as a framework for interacting with the consumer, with the exception of the industry leaders. In general, distribution channels are traditional and most distributors have adopted different forms of association (mostly by forming franchises, store chains and group purchasing organizations) that compete with a few large shopping centres specialized in home products. Consequently, there is a high degree of consolidation in the distribution, leaving little room for independent retailers.

Thus, the furniture market is characterized on one hand by the strong dominance of large distribution groups (international chains and large shopping centres specializing in the low and middle price product range, with a strong brand positioning in the mind of the consumer) and, on the other hand, a minority of fragmentary distribution (conventional independent retailing) that add value to the purchase of furniture (such as interior design). Among those in the latter group are, if only as a minority, manufacturers operating in the mid-high and high segments of the market who have chosen to integrate forward, controlling their own chain of stores or by setting up a franchise. In this manner, the manufacturer (who lacks brand recognition by the consumer in the low and low-to-middle end market) becomes a manutailer (manufacturer and retailer), promoting its image and gaining brand recognition.

The points of contact with the consumer are limited to the time of purchase



173

The value-added offered by furniture stores tends to focus the attention on the displays shopping atmosphere and the presentation of the product, with a certain development of sensory and environmental elements, although there is no specific adjustment to particular consumer segments with the exception of the larger distributors. Despite the general use of displays the low level of the customer’s interaction with the product entails that furniture sales depend largely on the performance and personal skills of the sales representatives.

Businessapproach

Price segment

Keybusinessvariables

Product mix

Relationshipwith theconsumer

Relationshipwith themanufacturer

Selling furniture in physical shops with a conventional retailingmodel based on displaying the product and having customersserved by sales staff.

Middle and low

Price, style of product, variety of products available at the pointof sale and possibility of selecting finishes from a range of predefinedoptions.

In the most advanced retailing, the product is displayed in theshop like a stage set, with the aim of creating an atmosphere thatis realistic and attractive to customers.

The furniture takes centre stage in its own right, with a limitedfocus on lifestyle.

In the most advanced retailing, the furniture shares the sales areawith products that go to make up a complete range of habitatproducts. To a lesser extent, the market leaders are graduallyorientating their business model towards specific lifestyles.

Focused on the moment of purchase, with no continuation overtime.

The manufacturer is a product supplier subject to competition fromemerging countries. The distributor does not allow the manufacturerto promote his own brand at the distributor s retail outlet, thisbeing a largely non-transparent market.

At the bottom end of the market, major distributors take on processesthat were traditionally the responsibility of manufacturers (design,buying materials, etc.), integrating vertically backwards.

At the top end of the market, manufacturers establish their brandamong consumers through the shops, cooperating to improvecommunication of the furniture at the point of sale. This is aprelude to strategies of vertical integration forwards on the part ofthe manufacturer, who takes on processes characteristic ofdistributors (presentation in the shop, communication, etc.).

Table 3.5.4. Characteristics of the predominant distribution model in the Retail Brand scenario in a 2016 time horizon.

The value-added offered by furniture stores tends to focus the attention on the displays, shopping atmosphere and the presentation of the product



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3.5.3.5 The competitive environment of the furniture manufacturer in the Retail Brand scenario.

The consolidation in distribution and its increasing international dimension is based on a context of worldwide economic growth led by China and the emerging countries, and by the facilitation of free trade between economies despite certain protectionist trends. Thus, multinational corporations invest in international trade, although they prefer to keep their headquarters in advanced countries. Still, multinational corporations of emerging countries are proliferating as well, and they try to position themselves in the advanced countries to gain access to their commercial networks and the end users.

The process of outsourcing furniture manufacturing from developing economies to others still developing is consolidated, and happens in a selective manner, by which the first processes to be outsourced are those with the lowest production costs. Accordingly, emerging countries control the majority of the world’s furniture production, subjecting developed countries to a strong competitive pressure. The higher investment in technology and knowledge, accompanied by improved manufacturing processes, has resulted in an increase of the productivity and competitiveness of the furniture sector in developing countries. In contrast, the need for differentiation encountered by furniture manufacturers whose plants are in developed countries generates additional costs to those of the emerging countries, since there is no obligation to meet higher technical standards for the entrance of furniture into the market.

This competitive pressure is compounded by the rising costs of the available resources, particularly of energy and raw materials used in furniture manufacturing, whose price is rising due to a strong global demand, and for which not have been developed enough substitute or renewable alternatives.

In this framework, international organisms prove ineffectual in their attempt to equate the market regulations of advanced and emergent economies, so the manufacturing and retailing conditions are unequal in underdeveloped countries (especially where it pertains noncompliance with environmental, labour and legal guidelines). Despite the sustained growth of developing countries, they still do not converge in full with developed countries. Due to all of the above, there are regions of the world (particularly South East Asia) that attract foreign investors, especially China and India, which have become industrial powers and the recipients of the majority of foreign investment in the global furniture sector. The risk levels of economies are the same, which leads large corporations to manufacture where the lowest is the cost.

Even though the trend towards outsourcing is a reality, the governments of developed countries still maintain some policies to protect the furniture industry in their territories. Thus, there is a certain degree of regional protectionism derived from the centralisation of politics in larger regions (European Union, NAFTA, etc.), which is the cause of obstacles and delays in international negotiations several times.

The governments of developed countries still maintain some policies to protect the furniture industry in their territories



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3.5.3.6 The players in the Retail Brand scenario

In the Retail Brand scenario of the furniture industry most of the players apply the value chain model to formulate their strategy, competing to increase their negotiating power and control over production processes and the market. The large international retailers dictate the furniture business model (products, communications and services) by which the main players in the scenario will define themselves in response to the context imposed by the consolidated distribution channels.

One of the unquestionable main players is the furniture distributor, in its different incarnations. In the low price segment, the large international specialized chain stores impose ironclad business terms to the remaining manufacturing firms and suppliers of raw materials, showing a clear trend to integrate backwards, assuming typical roles of the manufacturing industry such as design and choice of raw materials. Therefore, a consolidated distribution channel constitutes a clear example of a business model with a great capacity for product development and industrial capital, as well as of subcontracting the product manufacturing. Such a player is known as the refacturer, an expression which is a contraction of the words retailer and manufacturer and which captures the idea of backwards integration of a distributor that takes on manufacturing process. Refacturers are key players due to their unparalleled capacity to modify the relational structure of the value system of the furniture industry. To the extent that refacturers control the furniture market, the role of the manufacturer becomes more dependent and less proactive, as in actuality it is turned into yet another supplier at the global market, competing with other manufacturers from low cost countries, so the risk that it could easily be replaced increases to critical levels.

Another player of increasing importance in the scenario is the importailer, an expression derived from a contraction of the words importer and retailer. An importailer is a distributor offering a range of goods that consists of imported products. They may occasionally be organized in the form of chain stores, but there are also cases of wholesalers who import products from low cost countries and introduce them into the domestic market.

The counterbalance to the refacturer is the manutailer, an expression derived from a contraction of the words manufacturer and retailer. It refers to a company involved in furniture manufacturing getting integrated forward vertically, taking on functions which were traditionally performed by distributors and even controlling their own sales channels. This player has a prominent role in the high-end segment of the market, where competition does not have to do so much with production costs, but with the need to offer added value to the furniture consumer. The ability of the manutailer to add value at the sales point turns into a suitable ally for the small independent distributor, who needs this type of connections to revitalize his stores. In some cases the manufacturer can choose to take a step beyond this type of cooperation and create its own chain of stores.

One of the unquestionable main players is refacturer that captures the idea of backwards integration on the part of a distributor who takes on manufacturing processes

The counterbalance to the refacturer is the manutailer, It refers to a company involved in furniture manufacturing getting integrated forward vertically



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Some secondary players in the scenario are the large brands from other sectors with the ability to impose trends in fashion, lifestyles or art, such as Ralph Lauren and Martha Stewart, who exploit the critical mass of the furniture industry to expand the reach of their own brand. To do this, they promote alternative lifestyles to the middle and high-end consumer, until these end up being adopted by the leading brands.

As for consumers, their behaviour is embedded on dynamic virtual networks that have an effect on the market. As low cost countries gain control of almost every manufacturing industry and the scarcity of resources becomes more pronounced, the consumer tends to demand higher levels of quality control. While environmental experts take a practical approach to define the exact impact of the market distribution chain, activists are tireless in their promotion of the use of environmentally sound materials and the implementation of recycling processes and solutions for the public, the industry and institutions. Backed by well-structured organizations or at times revolving around a charismatic leader, both consumer groups and environmentalists advocate for worldwide cooperation.

The consumers, their behaviour is embedded on dynamic virtual networks that have an effect in the market



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Public institutions deserve special attention, since they implement industrial policy programmes to advance the competitiveness of manufacturers with uneven results. In this regard, there is an increased awareness of the situation of the industrial sector in advanced countries, so public institutions contribute to improve the positioning of such firms. As for financial institutions, they contribute to the product offers by facilitating their purchase. Along with the manufacturers of equipment, they are the principal link between the participating entities of the sector, supplying financial capital and knowing how to implement the concepts developed by traders and influenced by activists on favour of consumer. Technological developments in manufacturing and IT companies are the main sources of innovation, since financial institutions and equipment manufacturers are consolidated and less motivated to change.

The public institutions implement industrial policy programmes to advance the competitiveness of manufacturers



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For the furniture manufacturer, each of these intermediaries involves a new wave of liabilities: the fragmentation into sub-brands to target different trends, environmental standards, competition in costs, etc.

All of it notwithstanding, intermediaries also provide advantageous opportunities to manufacturers in the high cost countries:

• Promotion of the manufacturing brand, establishment of relationships with trendsetters at national level as a mean of differentiating the products. Local lifestyles are targeted, networks developed in the community.

• Labelled high-end products adapted to the local culture and culture and/or the exigent customer demands.

• Flexible innovative systems adapted or devoted to minor segments of the market.

In summary, the Retail Brand scenario implies an effort of the manufacturer to maintain his negotiating power related to the numerous intermediaries that exist in the market, which tend to consolidate and replace the national producers by manufacturers in emerging countries, or to use their position in other sectors to enter into the home furnishing market.

Opportunities in high cost countries for certified environmentally-concerned products



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Low ConsumptionSectorial scenario of the furniture industry in 2016

The Low Consumption scenario is the worst

future that the furniture manufacturing

sector may face in 2016. It involves a radical

worsening of the tensions and threats posed

to manufacturers by their competitive

environment in 2008.

This scenario is therefore one of negative

disruption with a severe impact on

manufacturers of developed countries.

3.5.4. THE LOW CONSUMPTION SCENARIO3.

5.4.1 Main features of the Low Consumption scenario

Unsustainability

Instability

Mistrust

Cost pressures

Stagnation

Lack of credibility of institutions

Unchecked offshore outsourcing

BRIC

Large distribution channels

Price

Rigidity of housing

Decrease in furniture consumption

Ageing of households


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Low Consumption scenario

One of the main characteristics of this scenario is the extensive outsourcing of a great part of the furniture industry from developed countries to emerging countries, whose competitiveness due to lower costs have given them control over most of the market. This phenomenon is motivated by the high degree of consolidation of the furniture distribution channels, organized as multinational corporations wich are pressing the global market towards continuous cost and price decreases.

The emphasis on pricing is transferred to the consumer, to whom furniture is neither a priority nor a need beyond the basics, so the consumption of furniture in advanced countries is experiencing a clear decline. Consequently, the processes of purchasing and using furniture are conventional, and there are no stimulating elements in the furniture market. The situation is exacerbated by a lack of solutions in response to demographic factors, particularly the radical ageing of advanced societies and the inability to renew societies with the organized immigration of skilled workers.

Furthermore, the private and public institutions abandon furniture industry due to their inability to alter the circumstances and redirect the manufacturer to a path of growth.


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Key features of the Low Consumption scenario

Table 3.5.5. Key features of the Low Consumption scenario.


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3.5.4.2 The consumer in the Low Consumption scenario

In 2016, the furniture market is characterised by a predictable and simple consumer, since his purchasing decisions are based on an aspect that prevails above all others: the price. Competitive pressures and a market geared towards the search of the lowest price have been transferred to the consumer, whose actions are motivated by the need to maximise the use of his disposable income and does not demand additional incentives for furniture as a product. Under these conditions, the market segmentation of the consumer is generic, does not contemplate the needs of the different users, and the manufacturer targets large segments filtered by price range. Companies hardly make use of segmentation variables; at most they take into account the socioeconomic status and family life cycle of the consumer to design their marketing mix. Consequently, the market for the demands of specific groups barely grows, although there is a small share of the market targeting a more discerning customer for whom price is not a critical variable.

Table 3.5.6. Characteristics of a conventional furniture pur-chase in 2016.

Functional buying process, based on seeking out the product and withno positive purchasing experience.

Visiting shops as a source of information about products and promotions.

Buying in local (neighbourhood) shops and in destination stores(superstores on the outskirts of the city) indifferently, depending onthe occasion.

Influence of mass media (radio, television, the press, etc.) on buyingdecisions.

Price as the predominant factor in buying decisions, followed byfunctional aspects of the furniture (durability...).

Choice of finishes and measurements from a range of options predefinedby the manufacturer (mass customisation).

Escenario Low Consumption

The purchasing decisions are based on an aspect that prevails above all others: the price

The consumer is affected by the rapid ageing of the population and the difficulty to incorporate young population flows through regular immigration processes, which contributes to a stagnant demand. Forming new households by the younger segments of the population slows down. Young adults stay longer at the parental home, and the extended family becomes a prevalent household type (which includes the members of the nuclear family and cross-generational or intra-generational relatives). In extreme situations, there is even a typology of a multiple domestic group formed by the cohabitation of various related or poly-nuclear families. Young couples that form new households purchase a basic products, the essential is to carry out the basic functions of the home (sitting, sleeping, storing, etc.). The coherence of household products with a given lifestyle is foregone, and priority is given to the price of the product. Only the higher socioeconomic classes indulge in the coherence of products and lifestyle, and they constitute a negligible percentage of buyers. In this manner, the demographic dimensions curb the development of an innovative demand that would force firms to add value to their furniture products beyond price and basic functionality.



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Concurrent to this, the unfavourable economic situation breeds passivity in furniture consumption. In general, families suffer the consequences of the declining economic and political context, and face challenges of a degree unknown since before World War II. The economic circumstances of families and businesses are much worse than they were ten years before as disposable incomes kept falling and inflation became increasingly hard to control through fiscal and monetary policies. A world economic crisis has shocked the agents of the economy by the end of the decade, with its worst effects felt in the Western world while the growth of emerging countries proved insufficient to compensate for their population boom. Per capita inequalities among countries have increased across the world. The working class is impoverished as a result of the poor economic conditions, as disposable incomes fell and unemployment rates rose. The rate of unemployment leads to the progressive perception of furniture as a commodity, and the selective criteria for its purchase to revolve around price. The income available for the purchase of durable goods (and of furniture in particular) decreases and the weight of such expenditures in the family budget loses ground to housing and other basic expenses. Under such circumstances, governments increase their spending to counteract the increasing levels of poverty and the public deficit skyrockets. Defaulting on payments is commonplace in some of the underdeveloped and emerging countries. Financial contagion leads to the instability of exchange rates and there is a generalised decrease in international investment. This results rising interest rates, which has a negative impact on the financing available to households. Credit becomes more restricted, limiting consumption.

Table 3.5.7. Characteristics of the conventional housing unit in the 2016 Low Consumption scenario.

The unfavourable economic situation breeds passivity in furniture consumption

As a result of all of this, the consumption of furniture declines. The already long furniture usage cycle is extended even more and furniture is replaced only when the state of disrepair does not allow postponement of a purchase any longer. Furthermore, the uncertainty of the circumstances encourage conservative and traditional behaviour in consumers, stunting the development of advanced lifestyles.

In this context, it is hard for cities to grow in an organized and sustainable manner. Urbanization processes are chaotic and rural areas are affected deeply by unsustainable practices. The construction sector cuts on the value-added of housing projects so the population can afford housing. Consequently, technical advances notwithstanding, housing developments in industrialised countries focus on a form of conventional housing with basic, rigid, and single-functional spaces, conventional energy sources, a lack of environmental integration, etc., none of them fosters the consumption of innovative furniture.


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3.5.4.3 Consumer value in the Low Consumption scenario

In 2016 furniture is used mainly to satisfy basic needs (storage, work and resting areas) associated to the conventional housing unit, which is the predominant format, leaving no room for innovation.

Since the market is driven by the search for the lowest price, furniture is considered to be a commodity that is a product with hardly any value-added. The consumer expects basic home furnishings of short durability, since the functional aspects associated with quality are eclipsed by the need for lower prices. This in turn entails that there are hardly any services provided around the furniture purchase, and in every instance value-added exists only when it comes at a lower cost to the consumer, even if this places additional burdens on him (for instance, transportation and assembly are taken on by the consumer, who will have to devote time and resources to these tasks in exchange for the lower purchasing price). In this context, financial services that aid the purchase are also widely accepted. As for value added, the evolution of society demands that certain aspects such as environmental impact and sustainability are taken into account without affecting the furniture sector beyond the compliance with legal regulations, since businesses are neither inclined to incur additional costs nor consumers to pay a higher price. The consumer does not question the source of the furniture as long as its price is lower and it poses no threats to his health or safety. Obviously, the major part of the market consists of low-price products and the middle and high-end offer form a minimum segment of the market.

The furniture is considered to be a commodity that is a product with hardly any value-added

Figure 3.5.5. Structure of the furniture market by price seg-ment. Low Consumption scenario.

Source: CEFFOR®.



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3.5.4.4 Distribution in the Low Consumption scenario

The furniture market is characterised by undifferentiated products, and a piece of furniture is not perceived as a potentially innovative product. The buyer is only interested in furniture when he has a need for it, and once the buying process starts it focuses on the transaction: the selection of the best opportunity, the customisation of the product based on some predetermined options and the payment, after which the consumer will not return to the same store. The life cycle of the piece of furniture is extended as much as possible, and turnover rates are small (unless a very deteriorated piece needs to be replaced); furniture is not a priority in the household budget, that is spent on more attractive products like electronics, computers, leisure…

There is a very high degree of consolidation of distribution channels that controls the low price segment of the market. A strong cost competition drives the need to consolidate into increasingly larger corporations or distributor groups, that exacerbate cost-based competition. This leads to the dominance of large distributors of international scope (global players), that are present in the market in the form of superstores (big boxes) and as Internet retailers, a new type of distribution channel that has become widespread in the search and purchase of furniture.

The furniture inventory of these large distributors is supplied at a global level, always driven by a search for lower costs in countries like China, which guarantees a high volume of imports to advanced countries. Furthermore, the lack of a country-of-origin or made-in effect in consumers prevents the unfavourable reception of furniture produced in emerging countries.

In addition to the large consolidated distributors, a minor segment of the market is controlled by a fragmentary distribution consisting of conventional independent businesses that offer value-added to the consumer (such as interior design).

The distribution channels and large distributors control the low price segment of the market


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Points of sale lack attractive and stimulating elements. The expectations of the consumer are based on the potential for finding the best value for their money, so customer service has to focus on offering such a value within the specific budget of the customer. Retail outlets are like warehouses that attract flows of consumers to the outskirts of urban centres, designed with an utilitarian approach (accessibility, easy parking, adjoining hospitality services…) rather than an interactive-based approach (shop activities, events, presentations…) of high added value. Purchase decisions are made by couples or families, and the consumer is open to market offers. The input of the consumer in product development is small, limited to the selection and configuration of his purchase.

No distribution channels offer an alternative to the conventional furniture store. The consolidation of distributors usually encourages the presence of a variety of retailing forms, but price limits their development.

Table 3.5.8. Characteristics of the predominant distribution model in the 2016 horizon Low Consumption scenario: the international megastore.

Businessapproach

Pricesegment

Keybusinessvariables

Productmix



Big business dimension of international scope and global approach(buying, marketing, etc.) thus obtaining the best prices.

Low.

Price and wide range of stock.

At the sales point, the furniture shares the sales area with productsof the same category (dining room furniture, sofas, etc.).

Focused on the moment of purchase, with no continuation overtime.

Advanced retailers promote a more active role for the consumerduring the buying process by facilitating greater freedom to navigatethe store or providing virtual tools such as catalogues or othermedia.

The manufacturer is a house brand supplier for the distributor,who has complete control over the value system.

The relationship is centred on price and on choosing the supplierswith the lowest costs (subject to basic conditions of delivery timesand service). The manufacture of the furniture is located mainlyin low cost countries.

The distributor does not work with manufacturers who have strategiesof promoting their own brand.

The expectations of the consumer are based on the potential for finding the best value for their money



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3.5.4.5 The competitive environment of the furniture manufacturer in the Low Consumption scenario

The furniture manufacturer in advanced countries endures unrelenting competitive pressures, so the closing of manufacturing plants in Western territories is quite common. In low cost countries, and South East Asia in particular, the industry is establishing itself as the global supplier of the furniture sector, and most production processes are carried out in developing countries that supply the large consolidated distributors. The majority of this furniture offer is mass-produced. Also, the little innovation in the furniture industry entails the continued use of conventional raw materials, increasing their cost and possibly contributing to the increase of offshore outsourcing towards low cost countries.

Since the loss of competitiveness of the furniture industry in advanced countries is manifest, governments have abandoned their attempts to protect the interests of local ventures. Thus, any company that maintains some of its production processes at the local level must be competitive on its own without any official aid, since such help has been diverted towards other industrial sectors of higher importance (aeronautics, biotechnology, pharmacy, IT, renewable energy…). Since they are not protected, the companies that want to have competitive prices end up offshoring their manufacturing processes, finalising the devastating effects on the furniture industry in developed countries that started evolving a few years back.Thus, the main feature that defines the production in

high cost countries is the small number of manufacturing companies at the local level. Market pressures have driven the offshoring of production processes and the emergence of large corporations in low cost countries. The few companies that survive in advanced countries are characterised by highly efficient processes and flexible structures that allow the customisation of their product.

Other businesses that used to be manufacturers in the recent past salvage their short-term solvency by positioning themselves as importers of home furnishings and products, maintaining their connections with the distribution channels.

The competitive pressure on furniture manufacturers is unbearable in develo-ped countries so it is common that the production plants in western countries are disappearing


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3.5.4.6 The players in the Low Consumption scenario

In 2016, in the context of economic hardships and the stagnation of the market, large corporations dominate the furniture industry, while the business conditions for the rest of the players depend on national and international economic policies with an impact on foreign trade and interest rates.

The furniture supply chain is dominated by those players whose circumstances allow them to offer the best price, as is the case of consolidated distribution channels with economies of scale of their supply and of manufacturers of low cost countries. The most efficient player is the one that increases its market share in the furniture sector. The dominant figure is that of the refacturer (retailer and manufacturer), which involves the backwards integration of large furniture distribution channels that take on manufacturing processes. In this scenario, international refacturers are the real protagonists in the furniture market. They control production processes and impose their purchase terms in a system of global auctioning looking for the lowest-cost supplier, guaranteeing the survival of low cost country producers to the detriment of manufacturers of advanced countries.

Another player with a high capacity to introduce imported furniture is the importailer, who in the Low Consumption scenario is represented by wholesalers from emerging countries that open warehouses in developed countries to provide low cost products to middle sized retailers.

Under these circumstances, the remaining players, including the national manufacturer, adopt reactive strategies to protect their local interests. However, the margin for the implementation of differentiation strategies towards salvaging the industry of high cost countries is minimal, so a considerable portion of the furniture manufacturing sector is lost in advanced countries.

Among the secondary players, consumer groups demand the implementation of economic policies to improve the welfare of the citizens by controlling prices, and subsidizing housing and low-income households. The mass media, which plays a smaller role in other scenarios, has a prominent part here in the defence of consumers abused by corporate

“malpractices” stemming from tax havens and multinational corporations that include low-quality products, unethical competition, unauthorized waste dumping, overexploitation of natural resources, etc.

Economic institutions regulate the internal protection of employment and trade. The importance of financial institutions is small. Credit systems and the conditions offered to consumers and businesses are more restrictive, although machinery manufacturers experience an increase of their sales to furniture producers in emerging countries. The initiatives of ITC providers focus on reducing costs and are backed and used by the leading brands.

In this context, national diplomacy tries to ensure access to raw materials in the international markets and docking areas of international harbours for troubled manufacturers, while hindering the material and transportation needs of low cost countries.

On their part, the public powers have hardly any weight in the Low Consumption scenario, given their inability to revert the situation reached by the market, now focusing solely on price wars where developing countries have an unbeatable competitive advantage.

In summary, the business of the furniture manufacturer in the Low Consumption scenario is in the hands of the large international distributors, that engage suppliers from emerging countries. As a result, the network of manufacturers of the furniture sector is shrinking in developed countries. The only alternative available to the furniture manufacturer is through differentiation in the high-end niche market, but it is too late for this market to grow.

The furniture supply chain is dominated by those players whose circumstances allow them to offer the best price



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Smart SolutionsSectorial scenario of the furniture industry in 2016

Smart Solutions involves a situation of progress

and innovation of the furniture industry in

2016. The threats posed to manufacturers by

their competitive environment in 2008 have

been overcome thanks to the standardisation

of world trade rules and to strategies of

differentiation and opening of the furniture

market towards delivering greater value

to consumers. This scenario is therefore

one of positive disruption, beneficial to

manufacturers in advanced countries.

3.5.5. THE SMART SOLUTIONS SCENARIO

3.5.5.1 Key features of the Smart Solutions scenario

Cooperation

Quality growth

Convergence

Dynamism

Stability

Sustainability

National manufacturing

Differentiation

Dynamic Point of Service

Shopping experience

Sophistication in housing

Consumption growth

New homes


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Smart Solutions scenario

One of the salient features of this scenario is that a great part of manufacturing remains in advanced countries, while the degree of outsourcing to emerging countries is minimal and under control. Despite the consolidation of distribution, which dominates the low end segment of the market, the manufacturer finds ample opportunities in the middle to high end segment, so in general the value offered to the consumer is high.

Purchasing decisions in the furniture market revolve around a set of attributes, some tangible (quality, design, etc.) and some intangible (emotional utility of the furniture, social value, potential for refurbishing, etc.). The value added to the sales of furniture are particularly relevant, so this can be considered a market of services rather than of goods, in which the ability of companies to generate value throughout the life cycle of the item is essential and to be considered in the process of product development at the stages of design, sale, use, refurbishing and disposal. Furthermore, the purchasing process incorporates pleasurable elements, guaranteeing positive shopping experiences to the customer. Therefore, this is a highly dynamic market, with active consumers that demand more value of providers.

Moreover, the contextual conditions contribute to the growth of the industry, with a favourable economic situation and a demographic rejuvenation that contributes to the innovation of the different ways of living and the renewal of social values.


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Key features of the Smart Solutions scenario

Table 3.5.9. Key features of the Smart Solutions scenario.


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Buying comprehensive solutions for the home, beyond furniture(decoration, complementary furniture-related elements such as textiles,etc.), that are included in the range of products offered by shops.

Search for proactive information in electronic and informal channels(blogs, consumer websites, etc.).

Reduction of loyalty to commercial formats, purchasing furniture throughvarious channels depending on where the buying experience is mostattractive (destination stores, local shops, electronic channels, buyersclubs, promotions, etc.).

Emotional and social factors are crucial in purchasing decisions, whilstfunctional aspects (quality...) are taken as basic.

Valuing the buying experience, visiting sales points for their ability toadd value to purchasing time and interacting with other buyers withthe same interests.

Users are active, demanding greater participation in furniture developmentand personalising phases of the buying process.

3.5.4.2 The consumer in the Smart Solutions scenario

In 2016, the furniture buyer operates as a driver for change, pushing for innovation in business practices. Consumers present a high degree of divergence in their needs and tastes, so the furniture and habitat market can take many forms. Far from being a market that meets generic needs, the evolution of the different lifestyles and more importantly of social values generates numerous opportunities for market segmentation, which results in the development of many segments that are clearly differentiated. This involves a high specificity of the target audiences, whose characteristics must be addressed in a specialized manner, while it becomes essential to establish an emotional connection with the buyer, who rejects generic product offers that overlook his particular situation and the way he uses and “experiences” the piece of furniture (for instance, a dining table can no longer be presented as a one-fits-all solution to all types of consumers, but it will have to consider specific details depending on the target audience, that could be one person households, young couples, households with children, seniors… and keeping in mind the timing and purpose of the usage required of the product depending on the consumer’s lifestyle, such as gatherings with friends, studying or working from home, as well as his values: security, ecology, health…).

Table 3.5.10. Characteristics of the innovative purchasing of furniture in 2016.

The evolution of the different lifestyles and more importantly of social values generates numerous opportunities for market segmentation



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The extensive segmentation of consumers is addressed by a focus on social values and differences in mindsets, seeking to establish an emotional connection through the product, but also through public relations: concepts such as security and privacy, personal health and wellbeing, beauty and the pursuit of a youthful appearance, connectivity or mobility mature and reach vast sectors of society. Most consumer segments are driven by these values, and the different ages groups have evolved towards predominant consumption typologies: pre-teen girls with behaviour of adults in terms of consumption of fashion and trends; creative teens with a strong demand for technological components in the products; adult women that consume whatever represents their feminine power and independence; men captivated by luxury items; or more active seniors demanding vital experiences adjusted to their functional level.In the Smart Solutions scenario, due to the framework of economic growth and the rejuvenation of the population, the market share of the products that take into account such demands proliferates, with a great emphasis placed on a fashionable component in the furniture geared towards young females and a technological one in the furniture designed for young males. Concurrently, rising life expectancies have led to the development of a sizable range of products adapted to the needs of senior users.

These new consumers coexist with a minority that prefers simpler products, with an emphasis on design but not necessarily adjusted to the consumer’s lifestyle. The segment that consumes undifferentiated furniture of low price and quality takes an even smaller percentage of the market.

This innovative consumption of furniture takes place under favourable demographic conditions, driven by a rejuvenation of the society that generates the growth of demand in terms of quantity and quality. The strong expansive trend in the creation of new households, particularly of young ones, is in effect the most significant global trend in this time horizon. Population growth and immigration are under control thanks to a rapid demographic transition and international agreements that regulate migratory flows in an environment of improved opportunities in developing countries and sustained demand for skilled labour in wealthy and emergent countries. In developed countries there is a peaceful coexistence of the autochthonous population and the controlled fraction of the migrant population that contributes to the rejuvenation of society. Immigration results in the creation of households or stable extended domestic groups (parents and children plus family members from older generations) which coexist with natives nuclear families with less members and higher average ages. The settling of immigrants increases the fertility rate of the receiving societies. This way, the base of the population pyramid broadens, which entails the creation of new households and thus of a higher demand for furniture. At the other end of the population pyramid, the life expectancy and quality of life of seniors has increased. The concept of “quality of life” involves the availability of a sophisticated home, flexible and adapted to the particular needs of each life cycle. There is a growing interest in the elements that form a home and also in the proportion weight of their costs that they represent in the family expenditures.

There is a growing interest in the elements that form a home and also in the proportion weight of their costs that they represent in the family expenditures


198

The economic conditions are propitious, and economic growth has experienced a boost in wealthy countries. New jobs are created at a fast pace in developing countries, depending on the stability resulting from the efforts of international cooperation agencies to intervene in regional conflicts, which are backed by the emerging powers. The higher incomes give rise to a fashion effect that encourages renovations in home furnishings and decoration. On the other hand, the deep reform of welfare in advanced countries has fostered increased productivity and self-reliance of young households. Consequently, long-term budget estimates are restored, stabilising the international financial system and restoring confidence in capital markets. Debt is carefully controlled, and the maintenance of the older segments of the population is based on a sustainable foundation.

In the field of urban planning, the articulation between rural and urban areas progresses rapidly on a global scale, thanks to a better understanding of sustainability and the use of intelligent infrastructures in transportation and social interactions. The great cities grow sustainably around integrated concepts of urban planning and following a horizontal growth pattern. Households evolve in a sophisticated manner, perhaps more in emerging countries, as the middle classes place themselves as the central agents of social and economic processes.

In 2016, residential construction is divided equally between value-added and conventional housing units. The value-added home itself reflects a lifestyle, both in form and contents and includes integrated systems of electromechanical applications for management and control that improves the quality of life of its inhabitants (security, communications, comfort, energy saving, etc.) guaranteeing flexible and user-friendly habitats where the technological component does not add stress to the resident. It is an important part of the promotion of new housing. To an intelligent home a part of furnishing is installed in harmony with the lifestyle of the target that it is addressed to. The inner spaces of this home are flexible and designed for multiple uses, and have multifunctional furniture. Concurrently, society moves towards a better work/life balance. More and better time is spent at home, and domestic life becomes more pleasurable and comfortable.

The value-added home itself reflects a lifestyle, both in form and content



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3.5.5.3 Consumer value in the Smart Solutions scenario

Furnishing is produced in the most innovative way in 2016 to meet the needs of a home that has evolved towards less rigid forms that can be adjusted to the needs of the resident. Thus, along with conventional housing units other types of housing are built with the potential entering innovative concepts into the home, which opens the doors to new developments in the furniture industry.

In the face of such developments, the rigid and generic single-function, multigenerational furniture product range (where the only differences are of an aesthetic nature) become less popular among consumers, who prefer the integration of technological component capable of broadening the solutions offered by the product, and also offer value that includes complementary services. Furthermore, furniture is demanded as part of an integral offer of home products based on a specific lifestyle. Social values gain importance, as the consumer seeks furniture that reflects his social status and lifestyle choices. A key factor in the purchase of furniture is the presence of metapreferences, which influence shopping decisions that are not based on personal taste, but on values, which tend towards ideals like sustainability or fair trade, and which are incorporated to the product development level of the selection of materials, components or functions.

Protection. The concept of protection is extended to embrace theconcepts of the healthy home and the sustainable home, where elementsof the housing unit contribute to improving standards of living withactive protection ideas, such as using materials that absorb radiationfrom electrical appliances, for example.

Well-being and comfort. Flexible and multifunctional spaces, with thepossibility of being adapted to different uses by individuals dependingon their lifestyle or particular needs (disability, etc.).

Socialization. Spaces are designed to be adapted to different socialuses in the home: informal meetings, working from home, etc. Theconcept of the digital home, where information and communicationtechnologies are integrated into elements of the home in an invisibleway, acquires greater importance.

Experimentation. The home is a space of daily creativity, partly becauseof the possibilities of the digital home.

Self-realization. The home is understood as the place that captures theessence of its inhabitants, becoming a spiritual sanctuary for them andan expression of what they have achieved in life.

GAIA sustainable housing project.National Association for the Home of the Future (ANAVIF) and National Association for Sustainable Architecture (ANAS).

Table 3.5.11. Characteristics of the sustainable home in the Smart Solutions scenario in 2016.

Along with conventional housing units, other types of housing are built with the potential of entering innovative concepts into the home

A key factor in the purchase of furniture is the presence of metapreferences, based on values


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In response to the dominant trend on the demand-side, furniture is conceived as a broad concept that encompasses the physical product and the services associated to home furnishing and the use of the product throughout its usage cycle (from its manufacturing to its purchase, use, refurbishing and disposal). These services expand the value proposition offered by the manufacturer, and foster the development of a business model that contemplates the entire value chain associated to the furniture product: interior design consultancy and furniture design, services around the maintenance, conservation, repair, refurbishing , refinishing, replacement of items, etc.

Along with the services, there is an emphasis on developing multifunctional furniture capable of adjusting to various uses according to the user’s lifestyle (for instance, a dining table that can also be used for studying or socialising). Another noteworthy aspect is that the design of furniture is coordinated with the rest of the elements in the habitat, making it easier for the consumer to envision the global style of the home before furnishing and decorating it. The

potential intangible benefit of the furniture, such as safety or health consciousness, bear an important weight in the mind of the consumer, so furniture design strives to eliminate any hazards to the consumer, while making its use easier (for instance, light chairs that are easier for seniors to move). Some of these advances are possible due to the incorporation of new technologies in the furniture industry, so that microchips, sensors, and other similar devices are part of the furniture structure, but always in a simple and user-friendly way, establishing the overall perception that furniture is a product of notable innovative character (equating it to other sectors: electronics, vehicles, etc.)

The product is manufactured taking into account environmental concerns, as the consumer expresses an increased interest in the country of origin and the manufacturing conditions of the product. This leads to the creation of systems that allow the close following of furniture through the stages of production, along with the careful messages of companies regarding their Corporate Social Responsibility, in an attempt to avoid a negative made-in effect and offer an image attuned to the new social values.In this sense, brand names gain more importance in this sector, since they become a reflection of the reputation of the manufacturer that provides distinction to the buyer (identity, image, exclusivity). This is translated into furniture with a strong symbolic charge, which intensifies the emotional attachment of the user to the furniture (identification with a specific lifestyle, self-identity, etc.). Due to all of the above, furniture occupies a privileged position among the spending priorities of families, so the volume of the furniture market increases, both in number of units sold and in price level. As for the price range, there is a major part of the market that can experience an increase of prices given the intangible marginal benefits offered by furniture in this scenario.

Figure 3.5.6. Structure of the furniture market by price range. Smart Solutions scenario.

The potential intangible benefit of furniture, such as safety or health consciousness, bear an important weight in the mind of the consumer

Source: CEFFOR®.



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3.5.5.4 Distribution in the Smart Solutions scenario

Since the value proposition of the furniture industry encompasses the entire life cycle of the product, it’s logical that the relationship with the consumer also expands in time. Beyond the objective to close a sale and forgetting about the customer, furniture sales attempt to establish a dynamic relationship with the buyer throughout his lifetime, addressing his needs as his personal or family circumstances evolve. The growing loyalty of the customer, cultivated by means of CRM (Customer Relationship Management) tools, aids the return of the customer and additional sales in the store, as it becomes commonplace to be in contact with the buyers before they begin a new purchasing process, which contributes to the fast revolving of the product and decreased average turnover rates. The buyer is not a passive agent, but participates in the different phases of furniture development, as he can function as a co-designer, a quality controller or to a certain extent a co-producer. All of this is possible due to the expansion of points of contact with the consumer, who extends beyond the store and makes the furniture market a multichannel environment featuring physical shops, websites, lifestyle-based brand-shopping clubs or other types of channels such as real estate agencies, enabling the customer to interact with the seller or the product in different ways.

The power of the consumer as a reference for other buyers is increasing, influencing their purchase processes. Informal communication channels are growing and the users exchange comparative information by virtual media like the Internet. In this way, the past experience and personal assessment of consumers become very significant as referral sources, contributing to a more complete information and transparency in the furniture market (public prices, features of each brand, etc.).

To fit to this type of consumer, distributors develop and control numerous channels, which they may own independently or in association with strategic allies (other distributors, other manufacturers, other sectors such as real estate, etc.). Virtual channels become necessary elements to maintain the relationship and the contact with the buyers by means of online tools (electronic catalogues), shopping clubs, virtual auctions or social networks. There is another distribution channel, the real estate sector, that integrates furniture as a part of the housing unit for sale. In this context, there is a proliferation of cross-buying between different channels using the information obtained through each of them helping to meet the integral needs of the consumer.

The buyer is not a passive agent, but parti-cipates in the different phases of furniture development


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The multiplicity of channels and options favours furniture sales in niche stores with a multi-product focus (for instance, shops for students where among other consumer products they can find furniture that suits their situation). The presentation and management of all of these channels are structured around the central concept of the buyer’s experience, reinforcing the proposition value of the furniture with events and activities that attract a constant flow of customers.

In this context, in addition to the large distribution groups the furniture market is characterised by the existence of other organized distributors and a significant number of independent retailers who specialize on offering a higher value-added to the middle and high end segments of the market. In particular, the collaboration between furniture manufacturers and high-end segment distributors has become a common practice, since the manufacturer is an essential ally in the image and public relations message of sales points, providing value to the distributor. In extreme cases, some manufacturers integrate forward and control their own distribution chains, managing the sales and PR variables and the relationship with the consumer.

Table 3.5.12. Characteristics of the distribution model in the high end segment of the Smart Solutions scenario in 2016: Collaboration between manufacturer and distributor.

Businessapproach

Pricesegment

Key businessvariables

Product mix



The business model is based on specializing in micro-segmentsof consumers, with a high degree of concentration on their lifestylesand attitudes and well developed administration of high valueadded services (interior design, repairs, maintenance, replacement,etc.).

Medium-high to high.

Depth in the range of products on offer geared to the targetmicrosegment of consumers and their values.

Complementary range of services offered throughout the usefullife of the furniture.

Positive buying experience during the purchasing process.Management of relationship with the consumer over time.

The product mix is centred on furniture and other products for thehome. Occasionally it includes products from sectors other thanhomeware, but in keeping with the lifestyle of the target groups.

Close monitoring of the needs and evolution of target groups.

Interaction with consumers in defining furnishing projects.

Relationship with purchasers throughout their family life cycle,with monitoring of the useful life of the furniture and of the needsthat arise in relation to it.

Collaborative, since the manufacturer often contributes value addedwhich is necessary for the shop concept. Furthermore, the consumerrecognizes and values the manufacturer’s brand, which serves topromote communication of that brand in the shop.

In addition to the large distribution groups the furniture market is characterized by the existence of other organized distributors

The multiplicity of channels and options favours furniture sales in niche stores with a multi-product focus



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3.5.5.5 The competitive environment of the furniture manufacturer in the Smart Solutions scenario

In the past few years, the incomes of developing countries have been converging rapidly to those of advanced economies, as increases of productivity in both wealthy and emerging countries gave a boost to demand and to investments into manufacturing processes. In 2016, direct investments flow freely and in large quantities among countries, with emerging economies intervening actively both in advanced and developing countries in a framework of stability. International trade continues to grow, as service markets and conditions for foreign investment are liberalized. Basic manufacturing processes have been outsourced to developing countries, but the more complex processes are still carried out in advanced countries. The world economy has dematerialised considerably due to the extensive use of Information and Communication Technologies (ICTs) and advanced services.

In 2016 the international context, led by developed economies, allows the free trade of furniture across borders. The offshoring process of furniture manufacturing from developed to less developed countries is consolidating and taking place in a selective manner, outsourcing those processes for which lower production costs can be attained, but mainly as a way to enter the emerging markets that already offer interesting consumer segments. There is a significant narrowing of the differences in lifestyles and consumption between developed and emerging economies. In this context, the global furniture production is spread across high and low cost countries, with a certain convergence in the competitive conditions of both groups. In low cost countries there has been constant innovation in management, manufacturing processes and product development, leading to an improved offer. Conversely, the cost difference between advanced and emerging countries has narrowed in the past few years, so the competitive pressure experienced by manufacturers in developed countries is relenting.

Basic manufacturing processes have been outsourced to developing countries


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Likewise, the growth of the market lessens the competitive pressure. In some cases, the cost advantage of specific countries as furniture manufacturing centres disappears. This is due partly to the rising social costs in underdeveloped countries, but also to international regulations that have succeeded in enforcing compliance with certain technical barriers to enter into the furniture market, which sets equal standards in every country. Price tensions in the raw materials traditionally used in the manufacturing of furniture and components are mitigated by the growing use of alternative and renewable materials, because there are incentives that support a higher efficiency in the use of energy and resources.

New financial centres coalesce in emerging countries facilitating the integration of financial systems at a global scale, and investment capital becomes widely available and of easy access. The tightly regulated international cooperation is partly responsible for the improvement of international relations, manifested in improved governance and in the implementation of intervention clauses in times of conflict as agreed by the various established and emergent powers of the world.

Despite the trend towards liberalization, international organizations have advanced in the establishment of equal standards in market regulations across economies, so the incentives for unchecked offshoring lessen. Still, the furniture trade sustains considerable growth rates at the international level, which is due to the existence of regions of the world (South East Asia in particular) that still attract foreign investment in the world furniture sector, with an emphasis on China and India. The level of risk is similar across economies, so the industrial policy of large corporations continues to produce where the costs are lower. However, counter to the trend towards offshore outsourcing, the governments of high cost countries carry out policies to protect the domestic furniture industry in their territory, which protects the high end segments of the market from massive offshoring. This is why there is a certain degree of regional protectionism derived from the political centralisation of certain regions (European Union, NAFTA, etc.), which at times results in obstacles and delays in international transactions.

The governments of high cost countries carry out policies to protectthe domestic furniture industry in their territory



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3.5.5.6 The players in the Smart Solutions scenario

In the Smart Solutions scenario the consumer plays a fundamental role in the furniture market. Factors such as a higher level of information, the ability to participate in the processes of product development, or the demand for value added in the purchasing process stimulate a differentiation market where firms can develop unique value propositions successful in different consumer segments. In a context of sustained economic growth, consumers demand specific offerings and furniture is seen as a way of expressing values and lifestyles. Besides, consumers are proactive in defining and promoting quality standards, ethical processes and behaviour through global organizations. Social networks expand all over the world, transmitting and popularising local products and trends as well as solutions for different consumer microsegments.

Given the polarisation of the market, the distribution involves different players in each market segment: on one hand, the refacturer and the importailer in the low end segment, controlling the manufacturing process (in the case of the former) and importing products from low cost countries; on the other hand a key player is the distributor of the middle and high end segments, who increases the value offered the consumer at the sales points by interventions that involve the collaboration of the manufacturer for a better presentation of the offer and improved communication with the customer.

The different forms of collaboration between manufacturers and distributors in the high end segment give rise to a whole category of critical players in the sector, due to their capacity to renew and stimulate the furniture market. The most frequent forms of collaboration range from distributor and manufacturer associations for the joint establishment of independent sales points or innovative services, to formats where the manufacturer takes control of the distribution processes (in the extreme cases, the manufacturer integrates forward and becomes a manutailer).

The players in each market segment are the refacturer and the importailer

Collaboration between manufacturers and distributorsin the high market segment


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Those players, who participate in the development of the furniture market by means of multiple channels, deserve special attention (stores, direct purchases, the Internet, mobile phone companies, shopping clubs, promoters…). Among such players stand out the ventures that incorporate electronic initiatives, such as online commercial product clubs or alliances for the cross-selling of products from different sectors. One prominent example is the increasing sales of furniture through real estate channels, where developers incorporate furniture into their integral housing offer. This way, there are ample opportunities in this scenario, new players appear with innovative potential: car rental agencies that expand their business to furniture rentals, industries of home decoration, raw material providers, recycling companies and appliance manufacturers that create new business segments and modify the traditional forms of furniture. An extensive collection of information specialists contributes to product development, from fields as varied as healthcare or sound engineering.

Another player is the prestigious trendsetter, who together with furniture designers and experts of fashion trends defines styles and influences the habitat market.

In a secondary level, other players are the system developers and equipment manufacturers who participate with their creative solutions, while economic and financial institutions play a limited role as facilitators of consumption.

In summary, furniture manufacturers in high cost countries find opportunities in the high end segment of the market, by deepening their knowledge about the needs and demands of different consumer microsegments. Consequently, a market based on differentiation is established, with competitive advantage for national manufacturers, and barriers to the entry of furniture produced in low cost countries. Independent retailing through conventional stores is still important, but the proliferation of business models in a variety of distribution channels makes it possible for the manufacturers to redefine their role in terms of knowing the consumer, brand recognition, specialised knowledge, products and systems, as well as international positioning.

Those players, who participate in the development of the furniture market by means of multiple channels, deserve special attention

Another player is the prestigious trendsetter, who together with furniture designers and experts of fashion trends defines styles



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MONITORING INDICATORSfor the 2016 scenarios

04

4.1. MONITORING INDICATORSFOR THE 2016 GLOBAL SCENARIOS The CEFFOR® scenarios describe the possible evolution of the furniture industry, and reflect the need for a monitoring system to enable us to establish which one of the scenarios the industry is evolving towards. To this end we propose a system of global and sectorial indicators that measure the degree of the occurrence.

An indicator is a unit of quantitative analysis that makes possible to monitor, observe and control the variables on which one aims to obtain information (in this case, the evolution of the industry towards one of the scenarios described).

The proposed methodology is based on a selection of quantitative indicators which represent the impact generated, through of the impact matrix, from a global socioeconomic environment to the sectorial environment of the furniture industry in advanced countries, being closely related to PREDICS® variables.

Each of the PREDICS® dimensions contains a specific objective, through which the global and sectorial situation in 2016 can be described.

· International political situation

· Retailing strategies

· Evolution of economic variables

· Evolution of demographic variables

· Level of international competition

· Consumer attitudes and behaviour

· Evolution of social variables and their implications inthe home

DEFINITION OF DIMENSION OBJECTIVE OF DIMENSION

· Degree of intensity of offshoring

· Degree of concentration of distribution

· Consumer propensity

· Aging/rejuvenation of the population

· Degree of competitiveness of low cost countries

· Degree of innovation in furniture buying behaviour

· Degree of innovation in the home

Table 4.1.1. Monitoring objectives of the dimensions of PREDICS®.


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Each indicator collects cross-checked information about the specific objective of the corresponding PREDICS® dimension. For this purpose periodical sources, either primary or secondary, are used. For each dimension we use a combination of indicators corresponding to global variables and others of a sectorial character.

Once the global and sectorial quantitative indicators had been identified and selected, representative data were obtained for them by carrying out a quantitative foresight analysis for 2016 in each case. For the purpose of exploring the indicators, ranges of variation were established for the expected values in each one of the global scenarios previously defined. These ranges were established on the basis of the trend value of the Retail Brand scenario projected to 2016, from which the upwards or downward variations were determined, and in this way the range of each indicator was estimated for the Smart Solutions and Low Consumption scenarios.

The indicators can follow different, or even opposing trends of evolution, and for this reason more than one indicator is examined for each dimension. Thus the evolution of a single indicator does not represent the materialisation of a scenario; it is an overview of the indicators for each dimension that must be interpreted in order to establish correctly which scenario the furniture industry is evolving towards in the 2016 horizon.

The CEFFOR® system of indicators can be extrapolated to countries with high production costs. The characteristics that shape advanced countries are similar in terms of furniture consumption situations or elements that influence the industry. For each country, therefore, monitoring the indicators will make possible to anticipate the global and sectorial situation which the industry is heading towards in the 2016 horizon.

4 · Monitoring indicators for the 2016 scenarios

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4.2. Indicators of theINTERNATIONAL POLITICAL SITUATION

4.2.1. Spanish OUTWARD FOREIGN DIRECT INVESTMENT

Definition of the indicator:Foreign Direct Investment (FDI) is the long-term placement of capital in some foreign country for the creation of agricultural, industrial or service companies with the aim of internationalizing.Objective of the indicator:Spanish outward Foreign Direct Investment forms part of the International Political Situation dimension, which measures the degree of intensity of offshoring by national furniture manufacturers. Implicitly represented within Spanish outward Foreign Direct Investment is the percentage of national furniture companies that have wholly or partially offshored their production abroad, and thus the indicator shows the objective to be reached in this dimension.In general terms, Spanish outward FDI has shown a decrease over the last few years. The foresight analysis shows a trend or Retail Brand situation for the financial year 2106 in a range which lies between 6 and 12 percentage points in relation to national GDP. The Smart Solutions scenario for this indicator would lie in a range below 6 percentage points, whilst the Low Consumption scenario would lie above 12 in its share of outward FDI with respect to national production.

4.2.2. DISTANCE BETWEEN THE BRIC COUNTRIES AND Spain

Definition of the indicator:The distance between the BRIC countries (Brazil, Russia, India and China) and Spain constitutes the difference between the competitive position of Spain and the average competitive position of the BRIC countries, measured annually, in the Growth Competitiveness Index (GCI). The Growth Competitiveness Index is a league table derived from a detailed survey, carried out by the World Economic Forum, which includes more than 8,700 business leaders in 104 countries and analyses the competitiveness of all the countries of the world.Objective of the indicator:The indicator enables us to observe the increase of competitiveness of the BRIC countries. The increase or decrease in competitiveness on the part of the emerging countries mentioned is an important factor for analysis within this dimension, to the extent that it may influence the degree of offshoring of national furniture companies.The distance between the BRIC countries and Spain has been getting smaller over the last five years, mainly distinguished by an increase of the competitiveness of these countries. In 2016 the distance between the BRIC countries and Spain in a Retail Brand scenario would be between 12 and 22 positions. The Smart Solutions scenario would be attained with a distance of more than of 22 positions in the ranking established by the World Economic Forum, whilst the Low Consumption scenario would be reached in a situation with a distance of fewer than 12 positions in the GCI classification.

4.2.3. IMPORTS OF GOODS AND SERVICES FROM BRIC COUNTRIES RELATED TO NATIONAL GDP

Definition of the indicator:

Imports of goods and services from BRIC countries related to national GDP allow us to observe the magnitude and the evolution of the presence of these countries within Spain.Objective of the indicator:Imports of goods and services from the so-called BRIC countries constitute a yardstick for analysing the growth, evolution and competitiveness of these countries. Observing the indicator will allow us to observe the degree of commercial development of the BRICs, analysed through the influx of trade across the national borders.A continuation of the upwards trend displayed by imports of goods and services from BRIC countries into Spain would generate the development of a Low Consumption scenario in 2016, with an influx of goods and services in excess of 6.75% in relation to national GDP. The Retail Brand scenario would arise in a situation in which imports of goods and services from BRIC countries stood between 3.75 and 6.75 percent of national production. A percentage of imports below 3.75 would give rise to the creation of a Smart Solutions scenario in 2016.

Indicators of the INTERNATIONAL POLITICAL SITUATION


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Foresight analysis of the indicator in 2016IMPORTS OF GOODS AND SERVICES FROM BRIC COUNTRIES IN RELATION TO NATIONAL GDP

Source: World Economic Forum. Compiled by: Furniture Foresight Centre (CEFFOR®)

Source: BDE. Compiled by: Furniture Foresight Centre (CEFFOR®)

Source: World Economic Forum. Compiled by: Furniture Foresight Centre (CEFFOR®)

Foresight analysis of the indicator in 2016DISTANCE BETWEEN THE BRIC COUNTRIES AND Spain

Foresight analysis of the indicator in 2016Spanish OUTWARD FOREIGN DIRECT INVESTMENT



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4.2.4. PRICE OF RAW MATERIALS

Definition of the indicator:The raw materials price index is a fixed weight or average (weighted) index of selected prices of raw materials, which may be current or future prices. It is designed to be representative of the broad asset class of raw materials or a specific subgroup of raw materials, such as energy or metals.Objective of the indicator:The price of raw materials constitutes one of the main incentives or barriers to the process of offshoring in companies. The objective of the indicator lies in analysing the evolution of raw materials markets in order to be able to see whether their development has a positive or negative effect on the process of offshoring in the national furniture industry.The growth of emerging countries and their purchases of world reserves of raw materials have been encouraging the latter to increase of price at a more intense rate during the last few financial years. If the current situation were projected as a trend to the financial year 2016 (the Retail Brand scenario), the price of raw materials would lie in a range of between 216 and 543 dollars. Below 216 dollars the price of materials would fall within a Smart Solutions scenario, whereas if, on the contrary, the price of raw materials stood at above 543 dollars, the scenario would correspond to Low Consumption.

4.2.5. PERCENTAGE OF Spanish FURNITURE MANUFACTURERS THAT MANUFACTURE A PART OF THEIR PRODUCTION ABROAD

Definition of the indicator:The percentage of Spanish companies that manufacture a part of their production abroad constitutes the share of the total of national furniture companies that have decided to undertake the offshoring of some part of the organization’s production process in a country different from that of origin, in this case Spain.Objective of the indicator:The percentage indicator of Spanish companies that manufacture a part of their production abroad is a sectorial indicator, allowing us to observe the degree of offshoring of national furniture companies.The offshoring of a part of the production processes of Spanish furniture companies to third countries has diminished over the last few financial years, mainly due to the increase of the price of energy and raw materials and the lack of profitability of offshoring projects. A decrease in the percentage for this indicator below 15% in 2016 would indicate a Smart Solutions scenario. With a percentage of offshoring among furniture manufacturers lying between 15 and 20%, the scenario would be Retail Brand. Above 20% of national furniture manufacturing companies with offshoring processes, the situation would be determined by a Low Consumption scenario.



214

Foresight analysis of the indicator in 2016PERCENTAGE OF Spanish FURNITURE MANUFACTURERS THATMANUFACTURE A PART OF THEIR PRODUCTION ABROAD

Source: Spanish Furniture Market Observatory. Compiled by: Furniture Foresight Centre (CEFFOR®)

Foresight analysis of the indicator in 2016PRICE OF RAW MATERIALS

Source: World Economic Forum. Compiled by: Furniture Foresight Centre (CEFFOR®).



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4.3. RETAILING STRATEGYIndicators

4.3.1. TOTAL NUMBER OF SHOPPING CENTRES OPENED ON A NATIONAL TERRITORY

Definition of the indicator:The indicator analyses the number of shopping centres that are opened annually in Spain.Objective of the indicator:The current model of development of concentrated distribution is put into practice through the presence of new shopping centres constructed on national territory. In keeping with the objective of the R dimension in PREDICS®, analysis of the total number of shopping centres opened on national territory enables us to analyse the degree of concentration of distribution in Spain. The total number of shopping centres in Spain has maintained a tendency to grow over the last few years. The continuation of this upwards trend projected to the financial year 2016 would entail a Retail Brand scenario with a total number of shopping centres on national territory lying between 500 and 650.Above the level of 650 shopping centres in 2016, the situation would be determined by a Low Consumption scenario, whereas a situation below 500 shopping centres would fit a Smart Solutions scenario.

4.3.2. EVOLUTION OF PRIVATE CONSUMPTION

Definition of the indicator:The Evolution of Private Consumption indicator analyses the annual behaviour, in terms of growth or decline, of expenditure on the part of family units, private companies and non-profit private institutions. The calculation excludes purchase of residential land and buildings, which are regarded as a form of property investment.Objective of the indicator:The Evolution of Private Consumption allows us to observe the consumption engaged in by families in goods and services. The indicator constitutes a yardstick for analysing the sales made by distributors, where most sales take place through a concentrated distribution network. Despite the irregularity in the evolution of private consumption nationwide over the course of the series analysed, the indicator shows a slightly higher value during the last financial year analysed than the figure for 1996. The state of the indicator in 2016 would produce a Smart Solutions scenario in an environment where the evolution of private consumption stood at above 4.5%. The Retail Brand scenario would become a reality in a situation where the evolution of private consumption lay between 2.5% and 4.5%, whereas a Low Consumption scenario for the industry would occur with a value below 2.5%.

4.3.3. MARKET VOLUME OF FURNITURE VIA CONCENTRATED DISTRIBUTION

Definition of the indicator:The indicator is derived from the percentage that represents market share corresponding to concentrated distribution in the national furniture industry over total furniture sales.Objective of the indicator:This is a sectorial indicator which identifies the degree of concentration of distribution, an objective of the R dimension of PREDICS®. Over the course of the last few financial years, the market share developed by concentrated distribution has been increasing in the furniture industry to a point close to 60% of total national distribution. A trend development, in the Retail Brand scenario, would mean that in the financial year 2016 the market share of concentrated distribution would lie between 57% and 70% of the total. Below 57% of concentration in distribution the scenario would be Smart Solutions, whereas an increase of the percentage of concentration above 70% would correspond to the Low Consumption scenario.

RETAILING STRATEGY Indicators


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Source: Spanish Association of Shopping CentresCompiled by: Furniture Foresight Centre (CEFFOR®)

Foresight analysis of the indicator in 2016TOTAL NUMBER OF SHOPPING CENTRES OPENED ON NATIONAL TERRITORY

Foresight analysis of the indicator in 2016EVOLUTION OF PRIVATE CONSUMPTION

Foresight analysis of the indicator in 2016MARKET VOLUME OF FURNITURE VIA CONCENTRATED DISTRIBUTION

RETAILING STRATEGY Indicators

Source: La CaixaCompiled by: Furniture Foresight Centre (CEFFOR®)

Source: Study of Consumers and Furniture Distribution in SpainCompiled by: Furniture Foresight Centre (CEFFOR®)


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4.4. Indicators of evolution of ECONOMIC VARIABLES

4.4.1. EVOLUTION OF CONSUMPTION OF DURABLE GOODS IN HOUSEHOLD FURNITURE AND FITTINGS

Definition of the indicator:The indicator shows the annual evolution of expenditure of families on products corresponding to group 5 (consumption of durable goods in household furniture and fittings) over total family income, according to data from the National Institute of Statistics in Spain.Objective of the indicator:The objective of the indicator is to observe the consumption in the family economy, as well as to identify the distribution of disposable income on household furniture and fittings and to determine consumer propensity of the part of families.Over the course of the series analysed, the indicator for evolution of consumption of durable goods in household furniture and fittings has shown a slight decrease in the percentage of total family expenditure that it represents. In 2016, a situation with a percentage of consumption of durable goods in furniture of over 7% would constitute a Smart Solutions scenario.In the case of families in 2016 who devote between 5% and 7% to buying these products, this would indicate the Retail Brand scenario. Below a percentage of 5%, the scenario that developed would be Low Consumption.

4.4.2. EVOLUTION OF ECB INTEREST RATES

Definition of the indicator:The basic function of the official European Central Bank exchange rates is to determine ECB monetary policy. ECB interest rates determine the interbank rate, which is used as the basis for setting the interest rates used by financial institutions for granting mortgages, credit, etc.Objective of the indicator:A rise or fall in this indicator may have a positive or negative effect on consumer propensity for durable goods on the part of consumers. Analysing the evolution of this indicator provides information on consumer propensity for durable goods in the future scenarios for 2016. Despite the irregular progress of European Central Bank annual interest rates, over the last eight years their level has only increased. The trend situation, in the Retail Brand scenario, shows values in 2016 of between 3.7% and 5.2%. Alternatively, above 5.2% we would be in a Low Consumption scenario, whereas below 3.7% it would be Smart Solutions.

4.4.3. FURNITURE CONSUMPTION GROWTH OF Spain EXPRESSED IN PERCENTAGE

Definition of the indicator:The indicator shows annual expenditure on furniture through national distribution, from which we can obtain a comparative with the result reached in the previous exercise.Objective of the indicator:Being a sectorial indicator, its objective fully coincides with that of dimension E in PREDICS®, which means the consumer propensity of consumers nationwide. Furniture consumption in the international context has been cut over the last few years, mainly because of the influx of products from emerging countries with lower production costs, as well as a change in the consumer habits of furniture buyers. The foresighting analysis to 2016 shows a Retail Brand scenario for this indicator in a situation in which the percentage growth of furniture consumption in that accounting year lies between 0% and 10%.A positive situation, the Smart Solutions scenario, would be determined by growth in furniture consumption in Spain of over 10%, while a decrease in the indicator, with a rate below zero, would indicate the Low Consumption scenario.

Indicators of evolution of ECONOMIC VARIABLES


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Foresight analysis of the indicator in 2016PERCENTAGE GROWTH OF FURNITURE CONSUMPTION IN Spain

Foresight analysis of the indicator in 2016EVOLUTION OF ECB INTEREST RATES

Source: National Institute of Statistics (INE)Compiled by: Furniture Foresight Centre (CEFFOR®)

Foresight analysis of the indicator in 2016EVOLUTION OF CONSUMPTION OF DURABLE GOODS IN HOUSEHOLDFURNITURE AND FITTINGS

Source: Banco de España (BDE)Compiled by: Furniture Foresight Centre (CEFFOR®)


Indicators of evolution of ECONOMIC VARIABLES


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4.5. Indicators of evolution of DEMOGRAPHIC VARIABLES

4.5.1. AVERAGE AGE OF THE NATIONAL POPULATION

Definition of the indicator:It shows the average age of the national population as a whole for a given period.Objective of the indicator:To observe the evolution of the average age of the national population, with the aim of determining the degree of aging or rejuvenation of the population in the future scenarios for 2016. The data show a slight increase of the average age over the last decade in Spain. The trend projection of the indicator to the financial year 2016 would lead to the Retail Brand scenario, where the average age of the Spanish population would lie between 40.5 and 43.5 years.A situation in which the average age of the Spanish population fell below 40.5 years would indicate a Smart Solutions scenario, whereas the scenario in which the indicator showed a figure in excess of 43.5 years would be Low Consumption.Foresight analysis of the indicator in 2016:

4.5.2. PERCENTAGE OF FURNITURE BOUGHT BY TYPE 2 COUPLES

Definition of the indicator:Definition of the indicator:Shows furniture consumption for the segment comprising households made up of couples where the main breadwinner is between 35 and 64 years of age. This is one of the groups of consumers that will be most significant in the future.Objective of the indicator:Enables us to identify the evolution of furniture consumption in a growing segment of consumers for 2016. Despite showing some slight growth, the situation that had been reached by 2007 shows a decline compared to 2003. The projections carried out for 2016 show a range of furniture consumption by type 2 couples of between 10% and 20% for the Retail Brand scenario. Higher consumption by such couples would constitute a Smart Solutions scenario, whereas consumption below the range just mentioned would place the future scenario in the Low Consumption category.Foresight analysis of the indicator in 2016:



Indicators of evolution of DEMOGRAPHIC VARIABLES


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4.6. Indicators of the level of INTERNATIONAL COMPETITION

4.6.1. EVOLUTION OF THE GLOBAL COMPETITIVENESS INDEX OF BRIC COUNTRIES

Definition of the indicator:Shows the degree of competitiveness attained by the countries known as BRIC (Brazil, Russia, India and China), according to figures published annually by the World Economic Forum through the Growth Competitiveness Index. The ranking is derived from a detailed survey which includes more than 8,700 business leaders in 104 countries and analyses the competitiveness of all the countries of the world.Objective of the indicator:The indicator reflects the degree of competitiveness of countries with low production costs. Despite the growth that the global competitiveness index of the BRIC countries displayed during 2006, in 2007 the indicator showed a decrease which placed it at values close to those recorded in the financial year 2002. The trend situation, Retail Brand, would present results in 2016 lying between 40 and 50 points in the Growth Competitiveness Index (GCI). In 2016, a situation of competitiveness measured in values exceeding 50 points would indicate the Smart Solutions scenario, whereas a situation with values below 40 points in the GCI would indicate the Low Consumption scenario.Foresight analysis of the indicator in 2016:

4.6.2. FOREIGN DIRECT INVESTMENT RECEIVED IN CHINA

Definition of the indicator:Volume of worldwide investment which China receives annually.Objective of the indicator:To analyse the improvement of China’s competitiveness through the percentage represented by worldwide FDI received as a proportion of China’s GDP. In spite of the stability displayed by figures for FDI received by China, the Retail Brand scenario would develop in 2016 in a situation where FDI received presented a value in the range 1.4% to 2.9%. The Smart Solutions scenario would correspond to a volume of FDI received by China of below 1.4%, whereas in the Low Consumption scenario the volume of FDI would be above 2.9%.Foresight analysis of the indicator in 2016:

Source: UNCTADCompiled by: Furniture Foresight Centre (CEFFOR®)

Source: World Economic ForumCompiled by: Furniture Foresight Centre (CEFFOR®)

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4.6.3. CHINESE EXPORTS OF MACHINERY AND TRANSPORT EQUIPMENT

Definition of the indicator:Explains the degree of competitive development and the volume of exports of productive materials of a technological character of China.Objective of the indicator:To observe the evolution and the degree of competitiveness of Chinese industry through identifying worldwide Chinese exports of machinery and transport equipment. Chinese exports of machinery and transport equipment have shown an upwards evolution over the course of the series analysed. In 2016, the Retail Brand scenario would develop in a range in which Chinese exports constituted between 49% and 67% of the country’s own GDP. These exports would account for less than 49% in a Smart Solutions scenario, whereas in a Low Consumption scenario they would amount to more than 67%.Foresight analysis of the indicator in 2016:

4.6.4. PERCENTAGE OF MATERIALS PURCHASED FROM ABROAD BY FURNITURE MANUFACTURERS

Definition of the indicator:Shows the percentage of raw materials used in furniture manufacture in Spain that are obtained from suppliers from countries other than Spain.Objective of the indicator:To analyse the competitiveness of those countries that supply raw materials for the national furniture industry, belonging to the category of emerging countries and characterised by a strategy based on reducing production costs. During the financial year 2007 there was a decrease in the percentage of raw materials imported from third countries, mainly due to the increase of world raw material prices. In 2016 the trend situation (the Retail Brand scenario) will show a percentage of imported raw materials in a range of between 25% and 40% of the total purchased by furniture manufacturers.The Smart Solutions scenario would produce a situation in which purchases of raw materials fell below 25%, whereas if raw material purchases exceeded 40% the scenario would be Low Consumption.Foresight analysis of the indicator in 2016:

Source: National Bureau of Statistics of ChinaCompiled by: Furniture Foresight Centre (CEFFOR®)


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4.7. Indicators of CONSUMER ATTITUDES AND BEHAVIOUR

4.7.1. PROPORTION OF INHABITANTS AGED BETWEEN 20 AND 35 IN THE NATIONAL POPULATION

Definition of the indicator:Determines the proportion of the national population aged between 20 and 35.Objective of the indicator:To analyse the degree of innovation in furniture buying behaviour, since it is the youngest segment of consumers that introduce new habits and behaviour into the furniture industry (for example through a greater propensity towards the use of new technologies in the marketplace). Over the course of the series analysed, the proportion of inhabitants aged between 20 and 35 has suffered a drop compared to the total population of Spain. In 2016, a percentage of the population aged between 20 and 35 lying in the range between 21% and 25% will give rise to a Retail Brand scenario. Above 25% the Smart Solutions scenario would occur, and below 21%, the Low Consumption scenario.Foresight analysis of the indicator in 2016:

4.7.2. NUMBER OF HOMES BUILT NATIONWIDE

Definition of the indicator:Shows the quantity of homes built annually nationwide.Objective of the indicator:A larger number of new homes implies greater furnishing opportunities, given the larger surface waiting to be furnished, which energises the furniture market and increases the chances of innovation in buying behaviour. The development of the construction industry has led to the number of homes undergoing an enormous increase of Spain during recent financial years. The foresight analysis of the indicator to 2016 would show a Retail Brand scenario in the range between 26.7 and 28.5 million homes in Spain. The Smart Solutions scenario would occur in a situation where the number of homes was greater than 28.5 million, whilst the Low Consumption scenario would be determined by a situation in which the number of homes built was below 26.7 million.Foresight analysis of the indicator in 2016:



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4.7.3. RATIO OF CONSUMER CREDIT TO TOTAL CREDIT

Definition of the indicator:Shows loans directed to non-productive activities other than buying or renovating homes.Objective of the indicator:To identify and analyse the consumer propensity for furniture, making it possible to energise the market. The weak growth of consumer credit during the first years of the new millennium has given way to a downturn over the period of years between 2003 and 2007. The trend situation (the Retail Brand scenario) in 2016 would show a range of values in which the ratio of consumer credit to total credit would be set at between 10% and 14.5%. The Smart Solutions scenario would arise with the indicator at a level above 14.5% of total credit, whereas the Low Consumption scenario would be a situation in which the indicator stood below 10%.Foresight analysis of the indicator in 2016:

4.7.4. AVERAGE PERIOD FOR RENOVATING FURNITURE

Definition of the indicator:Shows the average timescales followed by households in renovating furniture.Objective of the indicator:To identify the degree of dynamism in the furniture market on the basis of the timescales for renovating it, identifying possibilities for innovation in buying behaviour based on shorter timescales. The number of homes has undergone enormous growth over the course of the last decade, driven mainly by the post-baby boom generation and by the increase of immigration into Spain. The projections carried out for 2016 show a reduction in all the scenarios in the evolution of the number of homes nationwide. Foresight analysis of the indicator in 2016:

Source: BDE (Banco de España)Compiled by: Furniture Foresight Centre (CEFFOR®)


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4.8. Indicators ofthe evolution of SOCIAL VARIABLES AND THEIR IMPLICATIONS IN THE HOME

4.8.1. GROWTH OF THE NUMBER OF HOMES NATIONWIDE

Definition of the indicator:Shows the evolution of the number of homes created annually nationwide.Objective of the indicator:The new homes created nationwide are set up in dwellings with an ever smaller average surface area, which makes it possible to analyse the degree of innovation in the home on the basis of an increase of the flexibility of spaces. The number of homes has undergone enormous growth over the course of the last decade, driven mainly by the post-baby boom generation and by the increase of immigration into Spain. The projections carried out for 2016 show a reduction of the evolution of the number of homes nationwide in all the scenarios. The Retail Brand scenario would develop in a situation in which the increase of the number of homes fell in a range between 1.3% and 2.5%. With higher results the Smart Solutions scenario would occur, whereas a situation in which the results were lower would give rise to a Low Consumption scenario.Foresight analysis of the indicator in 2016:

4.8.2. Urbanization RATE

Definition of the indicator:Shows the percentage of the population that lives in cities of more than 50,000 inhabitants.Objective of the indicator:To observe the percentage of the population that lives in cities where, for reasons of limited space and territoriality, policy of the construction sector has led to the creation of homes with smaller surface, making possible to analyse the degree of innovation in homes. Despite the enormous growth that took place over the period 2001-2003, during the following accounting years up to 2007 there was a slight reduction of the indicator. In 2016, a percentage urbanization rate of between 53% and 55% of the total will indicate a Retail Brand scenario. The Smart Solutions scenario for this sector would be determined by values for the urbanization rate exceeding 55% of the total population, whereas the Low Consumption scenario would be indicated by a situation in which the urbanization rate fell below 53% of the total.Foresight analysis of the indicator in 2016:



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4.8.3. SURFACE AREA OF HOMES OF FURNITURE BUYERS (IN SQUARE METRES)

Definition of the indicator:Shows the average number of square metres in homes belonging to furniture buyers nationwide.Objective of the indicator:To analyse the evolution of the surface area of homes nationally, which, together with the other indicators for the S dimension of PREDICS®, can be used to identify the degree of innovation in homes. The surface area of homes of furniture buyers has suffered a reduction in its value over the course of the series analysed, down to 89.94 m2 in 2007. In the sectorial scenarios for 2016, an average surface area for homes of between 70 and 80 m2 would indicate a Retail Brand scenario.Below a surface area of 70 m2, the scenario would be Smart Solutions, whilst a surface area for homes of over 80 m2 would indicate the Low Consumption scenario.Foresight analysis of the indicator in 2016:


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Degree of intensityof offshoring

Degree ofconcentration ofdistribution

Consumerpropensity

Aging/rejuvenationof thepopulation

Degree ofcompetitivenessof low costcountries

Degree ofinnovation infurniture buyingbehaviour

Degree ofinnovation in thehome

OBJECTIVE

MACROINDICATORS

SECTORIALINDICATORS

MACROINDICATORS

SECTORIALINDICATORS

MACROINDICATORS

SECTORIALINDICATORS

MACROINDICATORS

SECTORIALINDICATORS

MACROINDICATORS

SECTORIALINDICATORS

MACROINDICATORS

SECTORIALINDICATORS

MACROINDICATORS

SECTORIALINDICATORS

TYPE OF INDICATOR

Agents

Marketequilibria

Global relations

Offshoring

Territory

Macro equilibria

Strategy ofdistributors

Macro equilibria

Market equilibria

Evolution ofconsumption

Demography

Demography

Agents

Market equilibria

Global relations

Level of competitionfrom low costcountries

Demography

Territory

Market equilibria

Type of purchase

Demography

Territory

Type of urbanisation

VARIABLE

Spanish outward Foreign Direct Investment

Distance between the BRIC countries and Spain

Imports of goods and services from BRIC countriesto Spain related to GDP

Price of raw materials

Percentage of Spanish furniture manufacturingcompanies that manufacture a part of their productionabroad

Total no. of shopping centres opened on nationalterritory

Evolution of private consumption

Market volume of furniture via concentrateddistribution

Evolution of consumption of durable goods inhousehold furniture and fittings

Evolution of ECB interest rates

Percentage growth of furniture consumption in Spain

Average age of the national population

Percentage of furniture bought by Type 2 couples

Evolution of the Global Competitiveness Index ofBRIC countries

Foreign Direct Investment received by China

Chinese exports of machinery and transportequipment

% of materials purchased from abroad by furnituremanufacturers

Proportion of inhabitants aged between 20 and 35in the national population

Number of homes built nationwide

Ratio of consumer credit to total credit

Average period for changing furniture

Growth in the number of homes nationwide

Urbanisation rate

Surface area of homes of furniture buyers (in squaremetres)

PREDICS SUBINDICATORS

GENERAL TABLE OF CEFFOR® INDICATORS FOR MONITORING THE SECTORIAL SCENARIOS FOR 2016


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STRATEGIC PLANNINGfor furniture manufacturers using CEFFOR® scenarios

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5.1. INTRODUCTION

The aim of CEFFOR® is to help small and medium-sized enterprises of the furniture sector of high-production-cost countries to adapt their business models to the competitive environment of the future in order to contribute to the economic, social and environmental sustainability of companies, people and regions. The scenarios and the system of indicators described in the previous chapters are tools which allow companies and other stakeholders in the furniture sector to define sustainable business models while at the same time providing essential information for public institutions to define the most appropriate sector policies.

As has been shown in previous chapters, the changes that globalization has caused in the furniture sector of high-production-cost countries are a matter of great concern, threatening the current business model of furniture manufacturers.

Some of the causes of the current problems include the poor evolution of company management systems. Up to now, management styles have been characterised by a personal and intuitive approach which will not be enough to successful management and run of companies in the coming years according to a scenario where the speed of change is increasingly rapid. In this respect, strategic scenario planning constitutes one of the most suitable tools for business management, fostering an analytic management approach based on market information and strategic analysis.


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The structure of this chapter starts with a description of the basic concepts of strategic scenario planning, with the aim of understanding the role of scenarios in the process of strategic reflection. The central part of the chapter describes the CEFFOR® method of interpreting scenarios in accordance with the company’s current business model. This method proposes four stages which range from an assessment of the existing business model to the implementation of a new sustainable model appropriate to the sectorial scenario.

Reading this chapter and applying the methodology into the company will require the managers and owners of companies to ask themselves some of the following questions: Will my company be in possession of the resources needed to be competitive in the scenario of 2016? Will my company have the resources it needs to be competitive? Will my company have a range of products and services that stand out from the competition? Will furniture as it is now still be demanded by future consumers, or will their requirements change? What level of dependence/cooperation will companies have with their distribution channels? How much time do I have for changing my current business model and strategy? Are my current resources (both human and material) used the right way to guarantee a sustainable business model? Which capacities of the company have to be maintained, strengthened or acquired in the future? Will the company need strategic allies to implement a sustainable business model? Which processes should the company keep, and which ones should be outsourced? What is the right level of diversification the company should have in terms of its revenue?

This chapter has two objectives: firstly, to present a method for strategic reflection that enables you to assess the aspects of your current business model in order to decide which parts of it should be kept, strengthened, improved or incorporated to achieve a new and sustainable business model; and secondly, to raise the awareness of the company and of the stakeholders in the furniture sector of the implications of each competitive scenario with regard to consumers, the product or service on offer, the distribution channels and the competition.

5 · Strategic planning for furniture manufacturers using CEFFOR® scenarios

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5.2. STRATEGIC SCENARIO PLANNING

Scenario planning is an exploratory analysis technique for designing business strategies and a discipline that has been used for years by governments and private multinationals’ strategic management support departments. Its use in the furniture sector represents a significant innovation of company management and an excellent tool for tackling the structural changes in the furniture sector.

Michel Godet, expert in prospective strategy and author of “From Anticipation to Action. Prospective Strategy Manual” and “Creating futures. Scenario Planning as a Strategic Management Tool”.

Looking at the future in a very simplistic and graphic way, we can identify four typical management attitudes: the ostrich (passive), the firefighter (reactive), the insurer (preactive) and the strategist (proactive). The ostrich’s approach consists of refusing to see the world as it is until change is forced it, sometimes very harshly. The firefighter’s approach is less passive and consists of waiting for the fire alarm before going to tackle it, a very risky policy. The ideal attitude leans more towards the preactive vigilance of the insurer and the proactive approach of the strategist, i.e. anticipating the threats and opportunities that appear on the horizon with the aim of correcting your route without abandoning its direction.

ATTITUDES TO THE FUTURE

PASSIVE

REACTIVE

PREACTIVE

PROACTIVE


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Not all scenarios require the same business strategy. Experience shows us that implementing a new business strategy takes at least three years, so it is necessary to commit to a particular scenario or have various alternative strategies in mind. However, a small company with few resources, which is typical of the furniture sector, cannot have various strategies to call upon depending on a given scenario. This commitment therefore entails certain elements of risk.

Finding the competitive advantage over your competitors can be achieved if the company is capable of anticipating events and is ready for them before they happen. Being prepared translates to having a value proposition (product/service) that is clearly different from your competitors; one that is sustainable in time and profitable. It is thus about moving from reaction to anticipation in your management approach. This does not mean that the company is not going to take any risks. What it is going to take is a calculated risk,

whereby following scenarios allow the company to anticipate its key factors with a certain amount of probability, and to take strategic decisions based on these factors. This entails a new, more analytic and forward-looking style of management that anticipates events.

The flowchart below shows the sequence of a conventional process of strategic reflection, showing where knowledge and the assimilation of scenarios are defined by the company’s management. With this method, before evaluating the strategic options you need to assimilate the scenarios.

In short, the aim of this publication is to enter scenario planning into strategic reflection processes as a means of anticipating events and helping to generate the desired sustainable future.

Figure 5.2.1. Integrating scenarios in a company’s business planning process.


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5.3. METHOD OF USING CEFFOR® SCENARIOS IN DEFINING THE STRATEGY OF COMPANIES IN THE FURNITURE SECTOR

This section presents the method for using the information of CEFFOR® scenarios in strategic reflection processes. It is worth pointing out that, given that the whole strategic reflection process is geared towards reaching a conclusion on the need to update (improve or change) the company’s current strategy, which inevitably is not the responsibility only of the company’s senior management, the process of reflection proposed below should involve the whole management team of the company to achieve and promote a shared vision of the organization’s future.

The method proposed below follows a pattern of evaluation-reflection-action in three stages:

1. Evaluation of the current business model. 2. Definition of a sustainable business model. 3. Connection with the current situation, implementation

and change management.

5.3.1 EVALUATION OF THE CURRENT BUSINESS MODEL

The aim of this stage is to assess the level of vulnerability of the current business model in the framework of the prospective scenario that has been selected as the most likely one. The results of this assessment should show either that the business model is solid and therefore profitable in the potential scenario or, alternatively, that is has certain weaknesses which make it unsustainable, requiring it to be redefined in accordance with the forecast scenario.

As mentioned earlier, it is advisable to carry out this self-assessment with the active involvement of all the members of the company’s management team. The different points of view facilitate a joint, objective vision without individual intuition predominating, which will encourage everyone’s involvement in the subsequent phases of the change process.

The most critical part of a process of strategic change is being aware of the need to change and not being afraid of taking risks (innovation) in setting goals. Fear and doubt about the adoption of an innovative approach which differs from the norm can stop the company from really changing and perpetuate the current situation. To avoid this, the first step entails considering the level of vulnerability of the current business model.


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5.3.1.1 Selecting the most likely competitive scenario in 2016

The evaluation of the current business model should be based on a future framework of reference that allows the strengths and weaknesses of the present to be identified. To do so, you need to define in advance what the most likely competitive scenario in 2016 will be out of all the possible ones.

It should be emphasised that interpreting realities is complex and difficult. Although the process of forecasting competitive scenarios in the furniture sector with a view to 2016 by CEFFOR® concentrating on three possible scenarios, the evolution of the competitive environment will almost certainly lead to two potential situations:

1. A clear outcome of one of the three scenarios defined by CEFFOR®. In this case, the choice is obvious: it entails choosing the most likely scenario and using it in the next phase of strategic reflection.

2. Possible combination of situations described in various CEFFOR® scenarios. You will need to analyse the common points and divergences between scenarios, putting a priority on planning the aspects that define consumer demand (given that the manufacturing sector and distribution channels are dependent on this).

Experience of using these kinds of management systems demonstrates that large companies carry out a full planning process for every scenario, being prepared for any form of execution. The size of companies in the furniture sector – small and medium – suggests that given their lack of resources, this optimum approach will not be possible, and therefore it is necessary to assess the most likely scenario based on which the process proposed in this chapter can be implemented. In order to do so, and with a view towards facilitating the decision-making process, AIDIMA has adapted its current Competitive Intelligence System so that by incorporating indicators in the regular studies it conducts, it can give companies sufficiently advanced warning about the most probable scenario outcome.

Source: Results of 1st Round of CEFFOR® Experts, 2007.


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5.3.1.2 Impact of the scenario on the existing business model

To assess the impact of the most likely scenario on the company’s existing business model, we propose a process of reflection focusing on the three pillars of sustainability: economic, social and environmental. This should be based on the key elements used to define a business model, these being:

• THE CONSUMER: the consumer segment that the company is targeting should be analysed, defining the variable that will allow the market to be segmented and identifying the needs of this demand.

• THE VALUE PROPOSITION: the range of products and services that the company offers its customers should be analysed, identifying the value expected by the target customers and the way in which the company delivers it to the market, at all times in accordance with the demands of that scenario

• CHANNELS AND RELATIONS: you need to define through which channels and with which kinds of relations the value proposition will be delivered to the target consumer, at all times in accordance with the sector scenario.

• MANAGEMENT INFRASTRUCTURE: the way the company is currently structured needs to be analysed to generate the value proposition (activities and resources), as well as cooperation agreements. All this needs to be assessed, bearing in mind the characteristics of the scenario, identifying the skills and knowledge necessary to create the value expected by consumers in this scenario.

• FINANCIAL ASPECTS: the company’s cost structure and revenue model needs to be analysed in accordance with the scenario, examining opportunities for generating new revenue formulas and reducing costs.

The annex to this chapter contains a proposed self-assessment tool for the current business model of a given scenario. This is a questionnaire with a series of qualitative questions based on the key elements defined above which have also been formulated from the perspective of overall sustainability (economic, social and environmental).

5.3.1.3 The decision to change the business model

The decision to change the current business model should be based on an in-depth reflection on the sustainability (economic, social and environmental) that this model offers in the medium- and long-term. If the conclusion is that changing the model is necessary, this process of reflection should continue through to the definition of a new and sustainable business model. The self-assessment tool in the Annex states that a score of less than 180 points makes it essential for the company to consider its model as vulnerable to the scenario, making it necessary to define a new business model.

The proposed process to be followed is detailed below to give the new model a proactive and forward-looking focus.


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5.3.2 DEFINING A NEW AND SUSTAINABLE BUSINESS MODEL

The aim of this phase is to obtain a new business model that is profitable in the context of the prospective scenario chosen as the most likely one. The process of reflection should focus on what is most appropriate for the company, regardless of any obstacles or limitations that might be perceived at first sight. It should be remembered that a part of the success of a new business model is based on the level of creativity/innovation that the company is able to promote.

Strategic planning based on prospective scenarios contributes, by helping to guide the actions themselves, to generating “desirable” situations that will make the business model profitable (always depending on the resources available and the company’s capacity to influence the business environment).

To a certain extent, the future that will affect the business “is in the hands of the company”. Described below is how to generate this future by considering the following six aspects:

• The consumer.• The value proposition.• The price.• The type of relationship with the distribution channel.• The level of integration/outsourcing.• Key capacities and competences.


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5.3.2.1 Considering the consumer of the new business model

The first consideration starts with the consumer of the new business model. Although the size of a company and its lack of resources may prevent it from selling directly to its consumers is obliged to make use of a distribution channel, it should not be forgotten that the consumer is a key actor of the differentiation strategies, so the aim is to orient the new business model towards meeting the real needs and desires of the ultimate protagonist and raison d’être of the product – the end user.

Later on, the company should think about the role of the distribution channels it will use to reach the consumer, and what functions they should fulfil. Irrespective of this consideration, users’ needs should be taken into account in every process (in terms of the business side – purchasing, design, production, logistics and marketing – and the support structure – administration, HR, planning and management, information technologies and infrastructures). The company needs to organize itself to generate the maximum levels of satisfaction and loyalty in its customers.

The idea is to define the target public to which the company is aiming its product. Based on this decision, the company should assess what aspects of its target customers are essential and determining in the scenario selected, and how the way of consumption is defined.

5.3.2.2 Considering the value proposition to be delivered to the consumer

The core element of the new business model will be delivering value to customers through the products and services offered by the company. The company should define a value proposition in accordance with its target market, bearing in mind exactly what this target customer values and how this value can be generated over time, taking advantage of household lifecycles and the value lifecycle of every product. In this respect, it should be emphasised that consumers demand value at every stage of the experience cycle: value when it comes to creating the product (where the consumer takes part in this definition), value when it comes to buying it, value when it comes to using it at home, value in the renovation process, and value in the process of transferring the product.

This reflection entails deciding which part of the required value is assumed by the furniture manufacturer and which by the distribution channel, basing the decision in terms of cost/benefit, and being aware of that any part of that value which is not fulfilled will be a source of dissatisfaction to the consumer.

The decision about the value proposition should be consistent with the company’s capabilities, without raising expectations in the customer which might later be let down due to the company’s lack of resources or capabilities. If this happens, the costs of losing the customer and resulting negative exposure will far exceed any potential benefit that might have been obtained as a result of attracting this customer in the first place.


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Each of the elements that make up the value proposition will represent costs, resources (human and material) and capacities that need to be specified so that at a later stage it can be decided whether their use was “profitable”.

During the reflection process, it is worth bearing in mind that certain elements of the value proposition belong to the basic dimension of the product in the current scenario, i.e. they are offered by most of the companies in the sector and therefore do not represent any form of genuine differentiation in the customer’s eyes.

On the other hand, it is advisable not to base the value proposition on the current capabilities of the company. This is a time for creativity and innovation in putting together the new strategy, so it is advisable to think about what a priori might be more sustainable in the medium and long term, considering the role and the objectives of the actors involved in the scenario (the situation of distribution channels and competitors in the immediate environment – high-production-cost countries – and those in other areas – low-production-cost countries – but with the capacity to access our markets either directly or indirectly).

5.3.2.3 Considering what price to assign to the value proposition

The third consideration focuses on price. After the company has defined the “basket” of values it wants to deliver in its value proposition it needs to consider and discuss the right price.

All too often, in the current furniture sector, the price is the result of a process of cost aggregation, to which the margin is added to make the infrastructure profitable. The starting point is thus what the company has, without questioning the fact that this might be limiting the business itself.

In contrast, through this process of strategic reflection the idea is to define the price based on what you want to deliver to the consumer, determining what costs this involves and deciding whether what is wanted is a price/value ratio that is accessible to the majority or the minority. Based on this analysis, the structure of the organization can be designed (as it affects the level of integration of the company’s internal processes) that allows this ratio to be achieved (modifying the limits of the individual possibilities of the company by seeking cooperation with other companies for those processes wherever necessary).

When what defines consumer behaviour are their values and lifestyles, the price as a dominant variable in the decision to buy loses its importance. The essential thing is the ratio between the value the company is delivering and the sacrifice (monetary or not) that the customer is making in return. An intelligent purchase, from the consumer’s point of view, is one that gives them a lot of value at a lower cost. Thus the price is not the key variable for segmenting future consumer markets, but the concept of value is.

Examples of this approach can be found today in all kinds of different sectors: in textiles, the INDITEX Group (ZARA); in the foodservice sector, STARBUCKS, etc. In all these cases, the key lies not just in the price but in other aspects of the value proposition, making customers aware that they are buying something more than just a product in exchange for a price.


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5.3.2.4 Considering the type of relationship with the distribution channel

Another of the aspects to consider for the new business model is the relationship with the distribution channels. This relationship, especially in small- and medium-sized enterprises, is a critical factor in the profitability of the business model, deriving from size and negotiating power. Any future decision that affects this relationship should be given a great deal of thought.

Continuing this argument, and having identified the value expected by the consumer in each scenario, the company should evaluate which one of the expected values currently constitute part of the company’s business, and which ones of them are in the hands of the distribution channel (present and future). With regard to the values inherent in the distribution channel, this consideration moves on to an analysis of how this factor performs and how this level of performance affects the current profitability of the company and, even more importantly, how it limits or facilitates opportunities for future growth.

Comparing this with the situation of other distribution channels for other consumer products, the current furniture distribution sector has a considerable development potential (primarily by improving the in-store buying experience for consumers, making it an enjoyable and stimulating leisure experience). The question from the furniture manufacturer’s point of view is, to what extent the current distribution sector allows for cogeneration (manufacturer-distributor) of innovations at the sales point. Today, the reality is, that major furniture distribution companies in high-production-cost countries tend to take on the responsibility of offering the consumer intangible benefits, even integrating vertically backwardss and taking on product design and the management of furniture manufacturing companies in low-production-cost countries (China, Vietnam, Brazil, India, etc), assigning furniture manufacturers a secondary role in case of certain products.

Each company, having reached this point, should analyse their personal relationship with their distribution channels and decide what would be the most suitable solution for a sustainable business model. At the same time, it is worth bearing in mind the emergence of new channels and alternative businesses which should be taken into consideration when the business is getting redefined.


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5.3.2.5 Considering the level of integration/outsourcing of value-creating activities

In fifth place, the company needs to think about its value chain and the activities that make it up. The level of integration of value-creating activities should be consistent with the decision about the price/value ratio of the value proposition the company wants to deliver. To do so, the key activities for creating the value proposition should be identified, seeking out business cooperation for processes where the company does not have the capacity or resources. In this latter case, the company needs to start searching for strategic partners.

In order to create a flexible business model, it would be advisable to outsource non-core activities. In this respect, the company needs to seek out suppliers who, subject to evaluation, can offer quality assurance, establishing long-term relationships with them. The search for suppliers in low-production-cost countries will be necessary if the cost structure makes this obligatory.

5.3.2.6 Considering the core capacities and competencies of the business

Finally, the company needs to define which capacities it needs to strengthen, develop or acquire in accordance with the key activities required by the value proposition. The new business model will require different capacities and competences to the previous model.

Traditionally, furniture manufacturers have focused their capabilities on developing and manufacturing the product, investing fewer resources in developing innovative commercialization processes or implementing marketing, strategic management and human resource management techniques, information and communication technologies, etc. In the recent communications led era, business models need capacities and competences that did not even exist years ago, so the company needs to determine how much time it needs to acquire them and implement them in its organization.


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5.3.3 CONNECTION TO THE CURRENT SITUATION, IMPLEMENTATION AND CHANGE MANAGEMENT

Once the new business model has been defined, the next step for the organization is to plan the course this change will take and assess any possible obstacles to it. The initial step is to identify the main obstacles to implementing the new business model. These obstacles can be found on two levels: internally, within the organization itself, and externally, in other companies, suppliers, clients, etc.

With regard to its internal organization, the company needs to give some thought to the distance between the knowledge and resources it currently possesses and the key activities and competences necessary for it to implement the future business model. From this reflection, the company’s strengths and weaknesses will emerge.

With regard to the process of change, the company should make an analysis of the level of flexibility of all its current processes, in terms of supporting staff and operatives (production, human resources, financial aspects, etc.). It may occur that the organization is too rigid, putting obstacles in the way of the process of change, in which case any uncertainties or fears that may arise will need to be mitigated.

With regard to people outside the organization, there may be opposition to implementing the new model. For example, the company might find obstacles in its path if the exiting distribution channel interprets the new business model as conflicting with its own interests. Some furniture distribution companies have stopped buying from certain manufacturers for seeing that they were opening their own stores. The furniture manufacturer needs to evaluate which distribution channels will be necessary for its new business model and what role the existing channel will play in it.

Finally, the company will need to think about the timescale and scope of the change. With regard to time, the fact is that the structural transformations taking place in the furniture sector leave a little margin for maneuvers, so decisions need to be taken quickly. In turbulent times like nowadays in the furniture sector, the availability of time in which to change gets smaller and smaller as the decision to implement changes is held back.


242

In more stable competitive environments, change processes can be given more time as there is not such an acute need for them. Also, the recent experiences of some manufacturers have shown that you need at least three years to consolidate a different business model. With regard to scope, it is possible that once the decision to make a change of strategy has been taken, there is no going back on that decision (the company puts out an identity on the market that cannot be varied, relationships need to be consolidated, processes need investment that has to be productive, etc.).

Based on the obstacles identified by the company, whether internal or external, it needs to establish a timescale for change and its scope. The company thus needs to base its analysis on the sustainability of this decision: both the period of time for implementation and the final situation. If this reflection generates any doubts as to the new competitive position, the sensible thing would be to redefine the scope and even the time allowed for its implantation.

Finally, it should be pointed out that during the whole implementation process the company needs to be extremely vigilant about the evolution of scenarios by means of the indicators published by AIDIMA. Although it is not a good idea to change strategy once the decision has been taken, it is equally inadvisable to be too inflexible if the events that defined the new direction change radically and point you towards another scenario. If only one of these events changes, then only the operational plans would need to be modified.

“People don’t change when you tell them there is a better option. They change when they conclude they have no other option”.

Michael Mandelbaum quoted in The World is flat. T.L.Friedman, page 462.


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5.4. ANNEXSELF-ASSESSMENT QUESTIONNAIRE

This annex includes a self-assessment questionnaire about the sustainability of the company’s business model in the most likely future scenario. The company making this assessment should read the instructions carefully and, based on its score, read the interpretation given later.

Complete the following qualitative questionnaire with a self-critical spirit. The scores range from 1 (the worst) to 5 (the best). When you have answered all the questions, add up the individual scores. The interpretation of this result is at the end of the annex, describing your situation and what actions you need to take.

INSTRUCTIONS


244

ECONOMIC SUSTAINABILITY


245

Customization in terms of choice

Q11 What is the level of participation (suitability) ofyour target customer in the choice of product?

Customization at the creative stage

Q12 How much does your target customer get involvedin the creative phase of the products sold by yourcompany?

Customization at the purchase stage

Q13 How much is your target customer involved incustomizing the product offered by your company atthe purchase stage?

Customization in terms of use

Q14 How much is your target customer involved at thestage of using the product offered by your company?

Customer relations

1 2 3 4 5

None(standardproduct)


Total(tailor-madeproduct)






Production flexibility

Q15 What level of production flexibility does yourcompany have to manufacture another product?

Flexibility of human resources

Q16 What level of flexibility do you have to produceanother product in terms of your human resources?

Key competences

Q17 Do your company’s strengths include the keycompetences that the scenario demands?

Level of competence in key capacities

Q18 What is your staff’s skill and knowledge level ofkey competencies?

Configuration of the value chain

1 2 3 4 5

None (rigid)

None (rigid)

Total(flexible)

Total(flexible)

No Yes, all

None Total

Weak position Strong position



246

1 2 3 4 5

Production cooperation

Q19 Do you think your company needs any kind ofcooperation at the production stage to be competitivein the scenario?

Only if the answer to Q19 is yes:

Q20 Has your company established a strategicproduction alliance?Fill in Q21, Q22 only if the answer to Q20 is yes:

Q21 Did you get the results you expected? (e.g. reductionin costs, shorter delivery times, increased capacity, newopportunities, etc.)

Q22 Are the results of your strategic cooperation allianceperceptible in the value proposition delivered to yourend customer?

Commercial cooperation

Q23 Do you think your company needs any kind ofcommercial cooperation to be competitive in thisscenario?Only if the answer to Q23 is yes:

Q24 Has your company established a commercialstrategic alliance?

Fill in Q25, Q26 only if the answer to Q24 is yes:

Q25 Did you get the expected results (access to newmarkets, improved service, increased sales, optimizationof resources, greater market exposure, etc.)?

Q26 Are the results of your strategic cooperation allianceperceptible in the value proposition that your endcustomer receives?

Technology cooperation

Q27 Do you think your company needs to establishsome kind of technological cooperation to be competitivein this scenario?


Q28 Has your company established a strategictechnological alliance?

Strategic cooperation

No Yes. Please specify:

No Yes, it iscompletelyconsolidated

None CompletelyAlmost none Partially Mostly

No Yes, totally

No Yes. Please specify:

No Yes, totally

None TotallyHardly any Some Most

No Yes, totally

Yes. Please specify:No

No Yes, totally



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Strategic cooperation

Q29 Did you get the expected results (access to newtechnologies, greater productivity, improved quality,etc.)?

Q30 Are the results of your strategic cooperation allianceperceptible in the value proposition your end customerreceives?

Purchasing cooperation

Q31 Do you think your company needs any kind ofpurchasing cooperation to be competitive in the scenario?


Q32 Has your company established any kind of strategicalliance for purchasing?


Q33 Did you get the expected results (reduction incosts, access to new raw materials, etc.)?

Q34 Were the results of your strategic cooperationalliance perceptible in the value proposition receivedby your end customer?

Logistics cooperation

Q35 Do you think your company needs any kind oflogistics cooperation to be competitive in the?


Q36 Has your company established a logistics alliance?


Q37 Did you get the expected results (reduction insupply times, reduction in delivery times of the finishedproducts, etc.)?

Q38 Are the results of your strategic cooperation allianceperceptible in the value proposition received by yourend customers?

No Yes, totally

No

NoYes, it is fullyconsolidated

No Yes, totally

No

No Yes, it is fullyconsolidated

No Yes, totally

Yes, it is fullyconsolidated

Yes, it is fullyconsolidated

None CompletelyHardly any Some Most



1 2 3 4 5


Cost structure

Appropriateness of cost structure.

Q39 How appropriate is your company’s cost structure interms of the value expected by your end customer?

Gap between costs/competition

Q40 What is the relative position of your company’s costscompared to your competitors in your strategic benchmarkgroup?

It iscompletelyconsistent

None

NoneVery broadandsustainable



248

SOCIAL SUSTAINABILITY

ENVIRONMENTAL SUSTAINABILITY


249


250

GLOSSARY

Anti-dumpingBarriers to prevent the practice by which a company sells a product on the international market at a lower price than it would sell it on the domestic market.

Value chainThe value chain categorises the activities which produce value added in an organization by distinguishing between primary activities based on the physical creation of the product, activities related to its sale and after-sales service and secondary activities related to the infrastructure of the organization, administration of human resources, technological development and supplies.

Distribution channelCircuit through which manufacturers make their products available for consumers to purchase. The geographical separation between buyers and sellers and the impossibility of sitting the factory right next to the consumer create a need for distribution (transport and marketing) of goods and services from their place of production to their place of use or consumption.

Consumer experience cycleSequence of phases in consumer demand for value from goods or services. The first phase comprises the value demanded in the creation of the product. The second refers to the buying process. The third phase centres on the use value of the goods. The fourth phase is orientated toward renewal or updating of the goods. Finally the fifth phase provides value for the consumer in replacing the goods. CRMCustomer Relationship Management. This refers to a business strategy based principally on consumer satisfaction, but also to the computer systems which support this strategy.

OffshoringA strategic decision taken by some companies to transfer their production facilities from advanced countries to countries with lower production costs.

Negative scenarioA scenario involving a moderate but detrimental change for the national furniture industry. It may be influenced by the predominance of the interests of certain players over others or by unexpected events. In the furniture sector it is known as the Low Consumption scenario and is the worst of those that the furniture manufacturing business may face in 2016. It involves a radical worsening of the tensions and threats posed to manufacturers by their competitive environment in 2008. This scenario is therefore one of negative disruption with a severe impact on manufacturers in advanced countries.

Positive scenarioA scenario involving a moderate and beneficial change for the national furniture industry, which may be influenced by players’ voluntary actions. In the furniture sector, this scenario is called Smart Solutions and involves a situation of progress and innovation in the furniture industry in 2016. The threats posed to manufacturers by their competitive environment in 2008 have been overcome thanks to the standardisation of world trade rules and to strategies of differentiation and opening-up of the furniture market towards delivering greater value to consumers. This scenario is therefore one of positive disruption, beneficial to manufacturers in advanced countries.

Glossary


254

Trend scenarioA scenario ensuring a continuation of the trends observed in the sector up till now, with hardly any variation in the variables and the players. It involves a perpetuation of the present situation, but in addition it incorporates the consequences of current behaviour. In the furniture sector, this scenario is termed Retail Brand and is defined by being a continuation in 2016 of the structural characteristics of the market and the competitive environment in which furniture manufacturers currently find themselves. This scenario is therefore trend-based in character and takes account of the consequences and implications of the furniture sector in high cost countries evolving in accordance with the trend observable up till now.

Basic lifestyleA lifestyle orientated towards satisfying basic needs, given limited resources (economic, educational, etc). It gives rise to an aspirational and predominantly materialistic type of consumption.

Consumer lifestyleA lifestyle which prioritises materialism, superficiality and the pursuit of immediate satisfaction. It is characteristic of consumers with a high degree of impulsiveness and active purchasing behaviour.

Integrated lifestyleA lifestyle based on the pursuit of personal fulfilment, either through improvement in personal status or through social action. It gives rise to leisure consumption, prioritising quality, technological aspects and advanced services.

Traditional lifestyleA lifestyle in which the predominant elements are conservatism, the defence of traditional values and the pursuit of security in a changing society. Traditional consumers display predictable purchasing patterns, with a preference for brand names and a tendency to value the personalised attention of traditional retailing. They are not usually consumers of technology.

StrategySet of actions carried out in order to achieve a particular objective. In the business world it refers to the design of a plan of action aimed at fulfilling the mission and vision of an organization.

GlobalizationGlobalization is fundamentally an economic process involving the increasing integration of different national economies into a single world market economy. The effect of globalization is to act as a force promoting structural change and to modify the conditions of competitiveness in markets, and it is of essential importance to the progress of countries at the present time. Globalization involves a redefinition of traditional roles and the appearance of new players on the world stage, altering political, social and economic conditions in particular countries.

ImportAn expression derived from a contraction of the words importer and retailer. An importailer is a distributor offering a range of goods which consists of imported products. They may occasionally be organized in the form of chain stores, but there are also cases of wholesalers who import products from low cost countries and thereby introduce them into the domestic market.

ManuimporterAn expression derived from a contraction of the words manufacturer and importer. It refers to a company whose activity evolves from manufacturing furniture to importing furniture from other countries, especially emerging countries.

6 · Glossary

255

ManutailerAn expression derived from a contraction of the words manufacturer and retailer. It refers to a company involved in manufacturing furniture which integrates forward vertically, taking on functions which were traditionally performed by distributors and even controlling their own sales outlets.

Mass customisationA system which combine the costs of mass production with the costs of the flexibility of individual personalisation.

Business model A configuration of business processes designed to deliver a product of value demanded by consumers within an income and cost structure.

Strategic planningStrategic planning is a prime tool of Strategic Management. It involves looking for one or more competitive advantages which the organization possesses and formulating and implementing strategies that enable it to create or preserve its advantages, all this being dependent on its Mission and objectives, the competitive pressures and the resources available.

ForesightingA discipline and a set of methodologies designed to predict the future. Basically it involves imagining possible future scenarios, called futurables, and sometimes determining their probability, with the ultimate aim of planning the actions necessary to avoid or precipitate their occurrence.

RefacturerAn expression which is a contraction of the words retailer and manufacturer and which captures the idea of backwards integration on the part of a distributor who takes on manufacturing processes.

Corporate social responsibilityAn active and voluntary contribution to social, economic and environmental improvement on the part of companies, generally with the aim of improving their competitive and evaluative standing and their added value.

SustainabilityMeeting the needs of the present without compromising the ability of future generations to meet their own needs. The ambit of sustainable development can be conceptually divided into three parts: environmental, economic and social. The social aspect is taken into consideration because social welfare is related to the environment and economic prosperity.

Target marketTerm commonly used in marketing to refer to the market segment towards which a particular product, service, communication or distribution is ideally aimed.

Consumer valueA set of tangible and intangible features (functional, emotional and social) which are demanded by consumers in a product or service and which they weigh against price and other costs when deciding whether to buy.


256

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the furniture industry in 2016 competitive scenarios: trends and strategic implications

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