Globalization: Strategy and Impacts on IKEA - Assignment Example

? Globalization: Strategy and Impacts on IKEA 20 Nov Table of Contents Background 3 Theoretical framework 4 Analysis - application of theory to evidence 7 Conclusions & Recommendations 10 Referencing & Bibliography 12 Background "The concept of globalization refers both to the compression of the world and the intensification of consciousness of the world as a whole" (Benedikt Kiesenhofer cited in martinfrost.ws.) The reason of this dynamic and disruptive world may be the uninterrupted change of the international economic environment that demands continuous development of the social sciences and above all in the areas associated with business. Many different areas of research focus on the change that is required according to their perception of importance of this change. First focus of great importance is on nation states, and competitiveness and comparative advantage related to them. The second major focus is on the establishment and administration of industrial companies, which refers to the establishments associated with mass production systems, and has undergone a decline and more pliant forms of industrial organization have demonstrated successful. A third focus is on the changing dynamics of competition among different organizations (Barlett and Ghoshal, 1998). Countries differ from each other in many aspects for which the management of a multinational company must decide if such differences are substantial enough to be reckoned. The important question here arises is that if there is a need for the organization’s behavior to conform to the international multifariousness or there are other ways to subdue the restraints enforced by cross-border diversity (de Wit and Meyer, 1998). In simple terms, globalization refers to exposure of global giant firms like IKEA to an enhanced global cognizance and interdependence. IKEA, the business of retail home furniture and house ware worldwide, is frequently used as a good example of an organization that has a speedy internationalization process and is seen as a king of globalization as compared to many other local rivals in the furniture industry (Hollensen, 2007). The purpose of this paper is to analyze and demonstrate as to why and how the IKEA has traded globally, and what strategies the company has formulated and implemented in order to respond to actual and potential impacts of globalization. According to IKEA cardinal activities such as eating, sleeping, storing items, socializing etc necessitate furniture and practical products that solve crucial human needs. Moreover, the immense majority of people have limited funds and space in their houses. The IKEA operates in a wide range of well-designed, functional home furnishing products that meets these needs by offering at prices so low that as many people as possible can afford them. The IKEA range contains products for every part of the home that have the label "Design and Quality, IKEA of Sweden" and are sold in IKEA stores (IKEA, 2011). As of October 2011, IKEA operates 326 stores in 38 countries. IKEA offers more than 9000 products which can be divided into four "Style groups": Traditional, Scandinavian, Modern, and Popular. The company's vision is "to create a better life for the many", according to one executive (Collins, 2011). The company’s global expansion is forced by the founder’s “intuitive quest for new opportunities” and a history of successful collaborations with worldwide suppliers (Grol et al 1997, p.93). Theoretical framework Economic globalization is the worldwide integration of economies by trade and investment flows, and the production of goods and services as well, in order to increase and intensify international competitiveness. It can also be defined as the process of stimulating and speeding international integration of markets that ensues an integrated global market in absence of national economic borders. In distinction from others, the economic visibility of globalization incorporates the development of global corporations and global networks; the far-flung internationalization of all sorts of economic activity in capital, production, consumption, marketing, standards and tastes; a rapid growth in intra-firm and intra-network trade of constituents, sub-assemblies and finished products resulting in a majorly more eminent level of specialization; the retrenching of product cycles by investing greater on product quality, innovation and niche marketing; the development and broad dissemination of lean production methods and a much greater disaggregation of production; the productive integration of a multicultural and transnational workforce with the objective of strategically distributing the economic and social benefits of multifariousness; the migration of labor-intensive and standardized-technology production to low wage economies; the reorientation of large-scale production in high wage economies to large-scope economies; the depletion or migration of intellectual and technical personnel to countries of advance information technology; the consolidation of outside financial and other services into the production cycle; and the rapid growth and dissemination of service and knowledge-intensive activities, regarding both products and processes, especially in highly-developed economies (Passaris, 2002). In relation to the context of management, the term “globalization” refers to marketing or strategy that adverts to the issue of international markets for consumer goods characterized by like customer needs and tastes enabling. This concept is counterpointed with internationalization which depicts the activities of transnational companies dealing widespread across borders in either products that are oriented to local markets, or commodities, or financial instruments. Globalization also intends cross-border activities and development acquired by management to adjust to the emergence of a globalized market or to assay and realize benefits from economies of scale or from cross-border learning amongst different country-based organizations. The term "corporate globalization" or "global corporatization" is mostly used to foreground the wallop of multinational corporations and also may refer to spread of capitalism from developed to developing nations (martinfrost.ws.). Globalization has faded national borders, free trade has heightened economic integration, and the information and communication revolution has made time and geography beside the point. In the new global economy, the role and functions of entrepreneurship have assumed added significance and confront compounded challenges. Today, in such a challenging environment with rapidly changing economic events, the private sector has turned to be the most important engine of economic growth and the public sector has been reduced in importance and influence. Entrepreneurs get to grips with contemporary challenges and new opportunities and are delineating the new rules of involvement on the economic landscape for a strong need to formulate a pragmatic vision, exert effective leadership and develop a highly competitive business strategy in this new environment. In order to heighten and intensify their competitive advantage, entrepreneurs should create the synergies that will permit them to incorporate the interactive elements of the globalized economy and formulate business strategies that will comprehend flexibility, a proactive approach to economic opportunities and a quick response time. Moreover, the global economy is rested on acculturation of innovation and its theme is built upon new initiatives with new ideas and new technologies (Passaris, 2011). Globalization has been determined by technological change and financial relaxation, and maintained by an appreciation amongst policy makers that an exposed, liberal and regularized international trading and financial system is crucial to global economic growth. The scope and substance of the new economy has turned genuinely global. The free flow of products among free trade regions, capital account liberalization, the development of new financial instruments and institutions, and instant access to information and communication via new digital networks, have produced a amply integrated global economic system of enormous scope and opportunity, and accomplished a more prominent stage of international economic interdependence and associations as compared to earlier economic systems (Gupta and Choudhry, 1997). Information technology and communications in the new global economy has played role of crucial importance which is especially genuine of the changing structure of international production. International economic transactions that used to be carried on between independent entities are now being internalized within a single organization or multinational corporation. So the break down of time and space with aid of the medium of information and communications technologies has preempted the physical market with the virtual market of the internet for business to business and business to consumer dealings (Cairncross, 1997). Analysis - application of theory to evidence Organizations have to take risks in order to grow and become more successful and to reap rewards for their efforts. There are a variety of different techniques businesses can practice when moving across-borders for gaining access in international markets. IKEA is a privately owned company that was established in the 1940s in a small village in Sweden by Ingvar Kamprad. The company has become one of the world’s preeminent retailers of home furnishings. It operated more than 160 stores in 30 countries in year 2002. IKEA’s business strategy incorporates the concept of selling Swedish designed, high-quality, self-assembly furniture products at low price. Its target market comprises of price-conscious young couples and families who are able and not reluctant to transport and assemble furniture kits (Introduction to Global Strategic Management). In 1961, Ingvar Kamprad, IKEA’s founder, decided to commence Swedish-based business in Poland to explore greater volumes and lower prices and the company took their first step towards the global organization of the IKEA today (Torekull, 1998). IKEA’s CEO, Anders Dehlvin observed that Sweden was a very small country and in such a country, very strong and successful business bounded its operators to go international after saturation of home market. For that reason in 1963, IKEA opened its first store outside Sweden in Norway and its second international store in 1969 in Denmark. In 1973, it moved outside the Scandinavian countries by opening its store in Switzerland and then entering a new country every couple of years. IKEA’s global strategy promotes the recognition that suppliers are usually located in low-cost countries with propinquity to raw materials and reliable access to distribution channels. It has over 2,500 suppliers dispersed in over sixty countries who develop extremely standardized products intended for the global market. IKEA works closely with its suppliers by helping them reduce costs, and sharing technical advice and managerial knowledge having exclusive contracts with them. IKEA’s internationalization strategy in Scandinavian countries and the rest of Europe has not focused substantially on local tastes and predilections in the different European countries. IKEA does not importantly and specifically alter its corporate strategy and operations to conform to local markets except when there is an obligating reason for doing so. This makes them reap the gains of economies of both scale and scope. Since, IKEA’s business strategy is based on low cost and affordability and adjustment according to each country’s local demands would result in higher cost of production and later on pressurize the company to increase its prices. IKEA implements its initial strategy of selling same Swedish-based product range wherever it stakes all over the world and to make it successfully happen, IKEA often uses a Swedish theme in its ad blitz, and has a Swedish blue and gold color scheme for its stores. In 1997, its international sales constituted around 89 per cent of its total sales. This shows that IKEA’s strategy of low responsiveness to local market peculiarities worked well internationally. The standardized products of IKEA had been able to be sold throughout Europe, and as a result of which the company was able to build substantial economies of scale into its procedures and sustain a price advantage over its competitors. IKEA’s entrance in the US market in 1985 was extremely challenging. IKEA opened twenty-six stores in North America between 1985 and 1996 but these stores were not marked as successful as compared to their similitude in Europe. It faced various problems in the US market because of company’s lack of attention to local needs and wants. US customers favored big furniture kits and household particulars. For instance, “Swedish beds were five inches narrower than those US customers were used to, IKEA’s kitchen cupboards were too narrow for the large dinner plates typically used in the US, IKEA’s glasses were too small for US customers who typically add ice to their drink and hence require large glasses—it is said that US customers bought flower vases thinking they were drinking glasses—and bedroom chests of drawers were too shallow for US consumers, who tend to store sweaters in them. In addition, IKEA Swedish-sized curtains did not fit American windows, a mistake about which a senior IKEA manager joked, ‘Americans just wouldn’t lower their ceilings to fit our curtains’.” The initial pathetic execution in the US market led IKEA’s management realize that a standardized product strategy must be adequately flexible to respond to local market needs. The company has recently assumed a more well-adjusted strategic approach considering global and domestic aspects which puts greater accent on global market coordination to limit duplication of activities and captivate synergies or economies of scale and scope. In the early 1990s, IKEA modified its strategy and adapted its products to the US market. Although IKEA’s subsidiaries are still working as extensions of the Sweden-based firm and follow the same strategy that is implemented from the centre, whereas subsidiaries in the US are given more liberty, to respond effectively to the local business environment and customer needs. Customization in the US to a greater extent exist in possibility by the large size of the US market, enabling IKEA’s subsidiaries in the US to design and develop kits specifically for the US market wholesale and therefore keep cost under control (Introduction to Global Strategic Management). Conclusions & Recommendations “Most things still remain to be done. A glorious future!” (INGVAR KAMPRAD, Founder of IKEA) The economic, social and technological development has created an integrated world market place, a global village, in which companies should essentially use worldwide scale economics to be competitive. This has headed to a melted off and more standardized product range, and specialized and specified production in many circumstances, simultaneously considering consumer tastes which are turning more homogenous and closely knit globally (Levitt, 1983). As discussed above that IKEA’s strategy in the US during the 1980s evidences that even the most successful formula in the national market can go wrong if transnational firms do not respond effectively to local business worlds. IKEA’s strategy functioned well in Sweden, Scandinavian countries and the rest of Europe, but it failed ab initio in the United States. The company had to rethink and focus on the perceived ecumenical appeal of its products, and redressed its activities to home markets without compromising the huge gains earned from sourcing and selling standardized products. Referencing & Bibliography 1. Passaris, C. E. (2002). Schumpeter and Globalization: Innovation and Entrepreneurship in the New Economy. Fifth Annual International Schumpeter Lecture. Viterbo. 2. Gupta, S.D. and Choudhry, N.K. (1997). Globalization, Growth and Sustainability. Kluwer Academic Publishers: Boston. 3. Cairncross, F. (1997). The Death of Distance: How the Communications Revolution Will Change Our Lives. Harvard Business School Press: Cambridge. 4. Gupta, S.D. and Choudhry, N.K. (1997). Globalization, Growth and Sustainability. Kluwer Academic Publishers: Boston. 5. Barlett, C.A. and Ghoshal S. (1998) Managing Across Borders, Harvard Business School Press, Boston 6. de Wit, B. and Meyer, R. (1998) Strategy: Process, Content, Context- An international Perspective, Thomson Learning, London 7. Levitt, T. (1983) “The Globalization of Markets” Harvard Business Review, May-June, p. 92-102 8. Torekull, B. (1998) Historien om IKEA: Ingvar Kamprad berattar, Wahlstrom & Widstrand, Stockholm 9. Grol, P. et al (1997) “IKEA: Managing Cultural Diversity” Cases in International Organizational Behavior (1998) edited by Oddou, G. and Mendenhall, M. Blackwell Business, Oxford 10. Hollensen, S. (2007). IKEA: Expanding through franchising to the South American market? - Case Study III.1, Global Marketing - A decision-oriented approach, 4 ed. Essex, England: Financial Times Press. 11. IKEA. 2011. Facts & Figures, IKEA Group 2011: Corporate PR, IKEA Services AB. 12. Collins, Lauren., (2011). A Reporter At Large, “House Perfect,” The New Yorker, October 3, , p. 55, Retrieved on 20 Nov 2011. From: http://www.newyorker.com/reporting/2011/10/03/111003fa_fact_collins#ixzz1eGlerRXX 13. martinfrost.ws. Retrieved on 20 Nov 2011, from: http://www.martinfrost.ws/htmlfiles/globalization.html 14. Passaris, Constantine E. (2011). The Business of Globalization and the Globalization of Business. Published on AllBusiness.com Retrieved on 20 Nov 2011, from: http://www.allbusiness.com/management-companies-enterprises/3958028-1.html#ixzz1eAb6hXtN 15. (Introduction to Global Strategic Management). Retrieved on 20 Nov 2011, from: http://www.oup.com/uk/orc/bin/9780199266159/mellahi_ch01.pdf Read More