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International Business Strategy. IKEA's Foreign Expansion into the Chinese Market

Term Paper 2017 22 Pages

Business economics - Business Management, Corporate Governance

Excerpt

Table of Contents

List of Abbreviations

ListofFigures

1. Introduction

2. Background & IKEAs current approach
2.1IKEA's firm specific advantages (FSA)
2.2 IKEA's Strategy
2.3 Expansion/entry Strategies

3. Ikeas expansion to China
3.1 Approach
3.2 Difficulties
3.3 Outcome

4. Outcome, results, or conclusion

ITM

List of Abbreviations

illustration not visible in this excerpt

List of Figures

Figure 1: The organizational structure of IKEA

Figure 2: Verbeke: International Projector

Figure 3: IKEA’s foreign expansion process

Figure 4: Hofstedes 5 dimension model: China vs Sweden

Figure 5: Porters Diamond Model

1. Introduction

The entrepreneur and founder oflkea, Ingvar Kamprad, has revolutionized the furniture industry by making IKEA one of the most systematic and recognizable shopping experience worldwide for customers1. Looking at the Swedish companies’ business processes & routines, IKEA could revolutionize the supply chain operations, optimizing the transportation of products in a cost-effective and time-efficient way2. Ingvar Kamprad followed clear strategies to make IKEA such a strong lucrative and well- established brand; as a young kid, he started buying small handy products like matches or pens in bulks, to sell them at a much cheaper price to the neighbors near his farm where he grew up3. Only seven years after this concept of selling products at a very competitive pricing strategy, Ingvar Kamprad started to include furniture into its product portfolio. This start-up store was named 'IKEA', standing for his initials IK and Elmtaryd and Agunnaryd being the farm and village where he grew up4.

The Swedish furniture store quickly expended to sell more than 8,000 home furnishing products, from kitchen cabinets to candlesticks; all products have had a 'democratic design’ which was 'not just good, but also from the start adapted to machine production and thus cheap to assemble"; IKEA manager Gillis Lundgren adds that IKEA "finds ways to alter the design of furniture to save on manufacturing costs"5. This was done by Ikeas 'flat packaging design, making the package more robust & easier to transport higher quantities, this also lead to IKEAs 'assemble-it-yourself strategy6 7 8, being one of Ikeas trademark nowadays. These improvements of processes in production & logistics clearly state how Ingvar Kamprad, the founder of IKEA, strictly followed his philosophy to provide cheap products by producing in a cost-effective manner. Ingvar Kamprad was very successful to fully implement this philosophy into his company, especially after the global expansion. IKEA started showcasing its products in large blue & yellow outlets that are architecture like a maze, making customers to go through every department to promote impulsive buying 7 8.

Additionally, Ikea realized that the employers in the first showrooms, including the large warehouse opening in Stockholm in 1964, were not able to handle the demand of the customers. Therefore, the Swedish furniture giant started to implement an open warehouse system, also known as the self-service approach for customers to easily pick their products themselves. These warehouse components were quickly adapted while expanding into foreign countries9.

IKEA's early foreign expansion

After IKEA was forced to outsource the production to polish manufacturers due to a supplier’s boycott in Sweden in 1950, the company benefited from cheaper production and consequently sustained an even stronger low-cost strategy.

Shortly after, the company started its foreign expansion into European markets in 1963 deprived of any local adaption to these markets. As IKEA’s former president mentioned that IKEA "don’t spend much money or time on studies...use our eyes and go out and look, and say it will probably do quite well here...quite often we stick to our opinion"10. IKEA’s managers have had a strong belief and passion for their products & the history of IKEA and its founder. The uniqueness of IKEA’s products has never been put in doubt, Ingvar Kamprad created his own market among people who had never been able to afford new furniture. He had turned to those who lived on very little11. IKEA could capitalize on a niche market which was present across the globe by further reducing costs by streamlining operations with local suppliers12. In other words, IKEA’s main driving force is to provide customers with trendy functional products in a minimalistic fashion, that are manufactured cost-efficiently with suppliers, and priced low enough so that most people can afford them.

The Swedish company first focused on the European market, using the same products and operational formulas as in its home country by using their intuition, resulting in high numbers of market share and overall sales. IKEA has taken the concept and planted it in many different countries. Since the concept has been unique and together with the Swedish touch, according to Anders Dahlvig, "IKEA stood for something different from the local, domestic competition. That uniqueness has given us (IKEA) the same advantages in each country that we had in Sweden in the early days"13.

During IKEAs globalization, the Swedish furniture retailer has been using home base exploiting, IKEA has in-house R&D, design, production, and logistics that tend to follow replicable formats across regions14. A necessary step to keep IKEA’s FSA, selling convenient furniture with a Swedish touch, relevant.

The decision to enter the Chinese market occurred in the 1980’s, due to the Chinese industrialization, leading to a rise in income, education, urbanization and a widespread of western values15. Additionally, the housing reform in the Chinese mainland, demanding for privately owned homes has been constantly increasing in urban and rural areas, consequently, demand for furniture has increased. The high profit potential comes with high risk for IKEA. Having only operated in the western culture, the Chinese market was one that IKEA had little to no experience of. Changing dynamics of consumer behavior and strong heterogeneity in terms of customers made it difficult for IKEA’s managers to predict future market trends in China16. Before entering the Chinese market, IKEA had to consider, high import taxation, complex government regulations, complex consumer buying behaviors, and strong competition.

The next chapters will further evaluate IKEA’s market entry strategies, routines & firm specific-advantages. Using Verbekes model to identify IKEA’s early expansion into foreign markets will give the reader a clearer overview ofIKEAs international operations. Looking into the Chinese market with the use of Porters Diamond and considering IKEA various approaches to become successful in such an economically strong market will give the reader some practical insights of the difficulties that can arise while expanding into foreign markets.

2. Background & IKEAs current approach

2.1IKEA's firm specific advantages (FSA)

IKEA operated as a highly globally integrated company, having the objective to reduce costs as much as possible by creating economies of scale through a more standardized product offering worldwide, also leading to higher brand recognition. IKEA has early developed FSA’s to outcompete other furniture retailers and to strongly grow globally. An FSA or firm-specific-advantage is primarily developed not because firms have a strong internal entrepreneurial drive, but because they face strong external pressure. These FSA’s are the outcome of strong domestic rivals, aggressive home-based suppliers, and demanding local customers17. Looking at IKEA’s FSA’s and howthey have been created will help to analyses how IKEA works internationally. IKEA has not relied on 'short-lived advantages’, also seen as location-based advantages such as raw materials or a large domestic market.

Supplier Network

After IKEA’s domestic suppliers boycotted the supply of material due to pressure of competitors, the furniture giant quickly outsourced its supplier network into eastern Europe. IKEA continuously worked on optimizing product development & supply chain management, thriving internal competitiveness between retail outlets and supply chain distributors within its large network to cut costs18. Global expansions also lead to an increase in vertical FDI & resource/efficiency seeking entry strategies & the acquisition of Sweedwood Group as a national producer.

Low-Cost Strategy

IKEAs cuts cost to match rivals by 30 percent on price19 20. This has been done by a rigorous process in product development, overseen by a product strategy council, which consists of selected senior managers who establish priorities for IKEA’s product line-up 20. Mark McCaslin, manager ofIKEA long island, has stressed the importance of steely competitiveness and relentless cost-cutting to lower prices on all products by 2-3% a year, he mentioned "We look at the competition, take their price, and then slash it in half"21.

Routines (one-size fits all approach)

IKEA has stream-lined their operations with local suppliers to create a sophisticated supply-chain while offering flat-packaged products to decrease shipping costs. By replicating their entire value chain across countries, IKEA could sell the same products across all operating markets22. Additionally, the mandatory routines and solutions that must be implemented at the store level are described in manuals that provide instructions on how to present, for example, a sofa in a store, or how to sell food in an IKEA restaurant23.

Retail Layout

The giant blue & yellow IKEA stores are recognizable across all markets and follow the same pattern, offering restaurants with Swedish food, a child-care area, hot-dog stands and a 'labyrinth' like outline. As IKEA grew into a flexible replicator, the stores haven been in response to the specific market situation. Whereas European IKEA stores are mostly found in suburbs, near highways, the Asian stores are more central located, near public transportation, due to the lack of car ownership in markets like China24.

[...]


1 Hill &Jones, (2005)

2 Antidote Issue, (1997)

3 Verbeke, A.,(2013),p.96

4 Kristoffersson, S., (2014), p.3

5 Hill & Jones, (2005), p. 16

6 Verbeke, A. (2013), p97

7 Bloomberg, (2005), p.32-36

8 Moon, Y„ (2004)

9 Verbeke, A. (2013), p. 97

10 Verbeke, A. (2013),p.99

11 Kristoffersson, S., (2014), p.20

12 Harapiak, C., (2013), p.26

13 Kling & Goteman, (2003), p.32

14 Foss, N.J., (2011), p.1098

15 Prange, C. (2016), p. 81

16 Prange, C. (2016), p. 81

17 Verbeke, A. (2013),p. 104

18 Harvard Business School, (1996)

19 Peter & Donnelly, (2013), pg. 431

20 Moon, (2004)

21 Bloomberg, (2005), p. 54

22 Foss,N.J.(2011),p.l080

23 Foss,N.J.(2011),p.l091

24 Verbeke, A. (2013)

Details

Pages
22
Year
2017
ISBN (eBook)
9783668541696
ISBN (Book)
9783668541702
File size
636 KB
Language
English
Catalog Number
v374774
Institution / College
University of applied sciences, Munich
Grade
1,7
Tags
Business Stratey IKEA Foreign Expansion China

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Title: International Business Strategy. IKEA's Foreign Expansion into the Chinese Market