Choosing the International Business Enterprise - IKEA - Case Study Example

Report Plan Name Course Tutor Date Section A: Choosing the International Business Enterprise 1.0 Introduction The report will analyze and focuses on IKEA using various concepts like Comparative and competitive advantage Market Entries, theories of Foreign Direct Investment and the Eclectic Paradigm and Organization form among others will be analyzed to demonstrate why IKEA was chosen. 2.1 Comparative advantages In corporation’s perspective, comparative advantage is defined as “the capability of a company to develop and produce goods and service at a low cost compared to other companies” (Deardorf, 2005). This statement reflects the true state of IKEA over the years. In 2007 Timber news argued that the Company settled for Sweden, Netherlands and developing countries because of cheap raw materials for making its products. In 2007, Timber news went ahead to say for over 25 years, Northern Swedish Company, Hedlunda Industry, has been continuously supplying IKEA with cheap pine wood. 2.2 Competitive Advantages IKEA posses various competitive advantages which it employs to gain its market advantage, and the include cost leaderships, differentiation and focus. In its cost leadership strategies of IKEA practices low pricing strategy. IKEA’s website in 2014 contended that the company launched products on a low pricing strategy so as to enable the middle income consumers to buy. Its costs are set low so that buyers can compare them with those of competitors and make informed decisions (The Times 100 n.d).. IKEA differentiates its more than 12,000 different products it offers on its website (Henley, 2008). The company’s products are identified majorly by one name which mostly holds Scandinavian origin (Henley, 2008). The names are unique are adopted from naming system developed by IKEA. The company focuses its business on specific market segment more than others. The company focuses more on office furniture more than home furniture. It dedicates most of its strategy and resource here because it forms their large customer base. 2.3 New Trade Theory A new theory of trade is aligned to getting the economy of scale. Management experts claim that economies of scale have become more significant to companies compared to comparative advantages (Douglas & Craig, 2011). The company has increased its production over the years so as to get cost advantages. The IKEA has posted more than 12,000 products which are on sale. Similarly, it has increased its number of machines to increase volume of its products. Such economies of scale have been improved because the company has a long term relationship with suppliers which provide raw materials at cheap prices. In 2014, IKEA’s websites claimed that the company has implemented economies of scale in reaction to increase in population, getting numerous materials and developing production processes. The new trade theory also supports network effect. The company can create a network of customers, which it targets (Sundararajan, 2007). In most cases, this can be created through technology platforms like Facebook, Twitter and other social networking sites. 2.4 Dunning’s eclectic paradigm IKEA are looking for new markets to invest in so as to reduce business risks. This is through ownership advantages, location advantages and internationalization advantages (Gray, 2003). 2.4.1 Ownership-specific advantages IKEA has adopted use of technology to enhance its research and development about the various needs of global markets. Also, the company uses its online presence to increase its customer’s base. According to Komassi (2013) between 2007 and 2008, there were more than 480 million people who visited IKEA's websites. Even if not all of them purchased IKEA’s products, but it created massive brand awareness (Gray, 2003). 2.4.1 Location advantages (Hitt, Ireland & Hoskisson, 2012). Today, IKEA enjoys cheap raw materials from its parent country Sweden. The company relies on one of its long time suppliers Hedlunda Industri. Also, the company has expanded into China and India where it now derives its cheap labor (Berger, 2011) 2.4.3 Internationalization advantages This is the process of engaging in individual company production rather than outsourcing through strategic partnerships. Dahlvig (201) contends that in the past, IKEA used to design furniture and gives it to other companies to produce it on their behalf. However, with numerous expansion in many countries, the companies tries to use its internal competencies by making use of its workers and machines to produce products which it majorly design in its headquarters in Sweden (Berger, 2011). 2.5 Organization form IKEA Company is a Swedish firm registered in the Netherlands, which design and sells furniture like chairs, beds, desks, appliances and other home accessories (Edvardsson, Enquist & Hay, 2006). According to Edvardsson, Enquist & Hay (2006), IKEA Company was first established in 1943 in Sweden and now owns and runs 352 outlets in 43 nations across the world. IKEA’s Website 2014 claims that some of the countries which IKEA has opened its outlets include Croatia, Qatar, China, Australia, Dominican Republic, The US, UK, Canada, Italy and Poland among others. The company is operated by a complex range of for-profit and not-for-profit corporations. Its corporate structure is categorized into two major parts including the operations and franchising. IKEA is recognized for making contemporary designs for different forms of furniture and appliance (Berger, 2011). Also, IKEA’s interiors design is usually linked with eco-friendly ease. Furthermore, the company is recognized for its emphasis on cost control, constant product development, operational details and corporate features that enabled IKEA to decrease its prices by 3% on average recently during its global expansion (Komassi, 2013). The company has also diversified its businesses and has interests in other industries such as hotel, real estate and mobile phones. 2.6 Market Entries In the last ten years, the company has recognized stiff competition arising from established companies and new companies and is now seeking new target markets to invest. IKEA management is concentrating on creating more outlets to be able to manufacture its products. It does the designing back in Sweden but send them to be developed in new outlets in the international markets (Komassi, 2013). The company is also emphasizing on licensing some companies to produce, for them already made designs which is often bears IKEA’s name. As stated earlier, the company has made entry into markets such as Russia, France, Germany, and US which also forms its largest market (figure3). 2.7 Economic Systems According to IKEA report of 2013, the company has posted positive financial results from 2004 save for 2008 during world economic crisis when its business was also affected. Dudovskiy (2012) states that in 2004, the company posted €21.846 billion. Since IKEA is managed by a non-profit organization, INGKA Foundation, its profits are not taxed. Also, the owners Kamprad family cannot acquire these profits directly. Gustafsson (2013) reports that in October 2013, IKEA registered an increase in sales by 3.1% mainly attributed to growth in China and Russia. Similarly, the company’s revenue increased to US$ 38.1 with a considerable growth also observed in the US. Expansion and growth of the company are a blessing to many who are to be employed in new outlets. According to Komassi, in 2013, it was estimated that IKEA employees 139,000 peoples across the globe. 2.8 Political factor and Legal factor In many countries, logging is prohibited. Also tough laws on environmental conservation are implemented and IKEA has to sign an agreement with the governments to be allowed in some markets (Lancaster & Reynolds, 2005). Majority of the environmental bodies recommend replacing of trees after cutting. IKEA complies with such laws through its written policies and code of ethics. Martins revealed that in 2000, the company launched its code of ethics for its suppliers which was referred to as IKEA way of purchasing, but was abbreviated as IWAY. Currently, IWAY is considered completely incorporated into the company’s purchasing model. Also, IKEA Company has employed nearly 62 IWAY auditors who carry out supplier audits annually (Dahlvig, 2011). The key function of the IWAY is to enable the company suppliers to comply with the law of every country in which they operate. This does not mean IKEA has not been condemned for its negative actions. In fact, in 1992, IKEA was disparaged for supporting logging through continuous furniture production (Dahlvig, 2011). The company discussed through a board of directors on measures which can be put in place to ensure environmental sustainability. Dahlvig (2011) went ahead to state that measures adopted include reduction in use of formaldehyde, doing away with acid-curing lacquers, replacing polyvinylchloride and adopting recyclable materials. Using its strategy, IKEA has managed to bring in INGKA Holding which is a non-profit organization. The process has helped the company to stay away from paying taxes. In the long run, it is good for the company because they make large profits. However, based on a socioeconomic view of the corporate social responsibility, proponent of this school of thought will argue that the company is only concerned with making profits, but ignoring the social welfare of the society (Mullins, Walker & Boyd, 2006). In this way, it denies public the taxes that would have been used for public service delivery. 2.9 Foreign currency risk The central bank of Sweden and even that of Netherland have intervention measures on currency, which IKEA is used to even numerous fluctuations. The company has expanded to other countries which have different currencies. The Times 100 (n.d) pines fluctuations of dollar normally affect this currency, which in turn affects IKEA businesses. Some of the weak currencies which normally affect the profits of the company include Japanese yen and Indian rupee. 3.0 Culture Culture has a very big influence on business because it influences the perception on the kind of furniture to purchase. For example, the company has one of its stores in China; research holds that China has a deep rooted history of traditions and culture which still manifest itself in business deals today (Meng, 2011). For that reason, EKIA is compelled to conduct research on effect of culture on buying decision so as to make products which satisfy societal needs. As such, the firm offers sometimes different products in different countries (Jayaraman, 2009). 4.0 Section B: Library Catalogues Search 4.1 Books Berger, A 2011, Operations Management: IKEA, Grin Verla. Dahlvig, A 2011, The IKEA Edge: Building Global Growth and Social Good at the World's Most Iconic Home Store, McGraw-Hill, New York. Komassi, E 2013, The sustainability product scorecard at IKEA –Strategy development Analysis, in Swedish school of textile. Boras University. Lancaster, G & Reynolds, P 2005, Management of marketing, Oxford, Elsevier. Hill, J 2010, Theory of Strategic Management with Cases, International Edition, South Western College. Hitt, M.A, Ireland, R.D & Hoskisson, R.E 2012, Strategic Management: Concepts and Cases: Competitiveness and Globalization (10th Ed.), Cengage Learning. Meng, F 2011, Phenomenon of Chinese Culture at the Turn of the 21st century, Singapore, Silkroad Press. Mullins, J., Walker, J & Boyd, H 2011, Marketing management: a strategic decision making Approach, Boston, A McGraw-Hill Irwin. 4.2 Journals Edvardsson, B., Enquist, B & Hay, M 2006, Values-based service brands: narratives from IKEA, Managing Service Quality, Vol. 16, p. 230-246. Daqian, L 2005, The model of IKEA in China: the leader of home culture. Economic Tribune. Vol. 3, p 57-85. Gray, H 2003, Extending the Eclectic Paradigm in International Business: Essays in Honor of John Dunning, Edward Elgar Publishing. Sundararajan, A 2007, Local network effects and complex network structure, The B.E. Journal of Theoretical Economics, Vol. 7, p. 36-49. Jayaraman, K 2009, Doing business in China: A risk analysis, Journal of Emerging Knowledge on Emerging Markets, Vol. 1, p. 55-62. Douglas, S & Craig, C2011, The role of context in assessing international marketing Opportunities, International Marketing Review, Vol. 28, p. 150-162. Deardorff, A. V 2005, How Robust is Comparative Advantage? Review of International Economics, Vol. 13, p. 1004–1016. 5.0 Section C: Internet Resource 5.1 Internet Resources Li, Z 2010, The Competitive Advantage of IKEA and IKEA in China, University of Gavle. Retrieved 3rd Dec. 2014 Gustafsson. K 2013, Ikea Full-Year Sales Gain 3.1% Helped by Growth in Russia, China, Bloomberg Businessweek, Retrieved 3rd 2014 Henley, J 2008, Do you speak Ikea? The Guardian (London). Retrieved 3rd 2014 Timber news 2007, Raw materials from SCA become IKEA furniture, Timbernews IKEA 2014, IKEA Official Website. Retrieved 3rd Dec 2014 http://www.ikea.com/ The Times 100 n.d., IKEA: SWOT analysis and sustainable business planning, Retrieved 3rd Dec 2014 < http://www.circleinternational.co.uk/CIRCLE/Strategy_files/ikea%20mrktswot.pdf> Martins, T 2010, Ingvar Kamprad Quotes: Business Leadership Advice from IKEA’s Founder, Retrieved 3rd Dec. 2014 http://www.strategicbusinessteam.com/famous-small-business-quotes/famous-business- and-leadership-quotes-from-ingvar-kamprad-founder-of-ikea/ Dudovskiy, J 2012, IKEA. Research Methodology, Retrieved 3rd Dec. 2014 http://research- methodology.net/ikea/ 6.0 Section D: Statistics and Secondary data The furniture design is modern an light, the prices comparatively low. Sales by region Asia + Australia 3% North America 16% Europe 81% Figure 1: The figure depicts how IKEA has performed in terms of sales in 2013. Europe is leading by 81% of sales Figure 2: IKEA‘s revenue from 2001 to 2013 As state earlier, IKEA has posted positive financial results since 2001 Source: (Statistics.com a) http://www.statista.com/statistics/264433/annual-sales-of-ikea-worldwide/ Figure 3: top selling nations of IKEA furniture in 2013 The figure portrays IKEA large markets in the world. Germany forms the largest market with 14% sales. Source: (statistics.com b) http://www.statista.com/statistics/255583/leading-5-selling-countries-of-ikea-products/ 7.0 Section E: Thesis Statement In the global markets, IKEA has not found progress easy. The company has faced numerous business risks such as structural control, cultural, economic and legal aspect. The company has expanded into numerous markets hence making it hard for the management to control the operations of all its stores across the globe. Also the company has been disparaged by environmental activists for destroying forest. In spite of all challenges, IKEA has been able to rise above and succeed in global markets through its unique strategies. 8.0 Section F: Report Plan (10-15 pages in total) 8.1 Introduction (100-200 words) Introduction of the thesis statement IKEA globalization and expansion The report’s objective 8.2 Internal competencies and how the company participates in global trade (1499 words) Organizational form: IKEA as international company Competitive Advantages:(1) cost leaderships, (2) differentiation and, (3) focus Intangible New Trade theory: economies of scale and support network effect Dunning’s eclectic paradigm : IKEA must consider the following conditions; ownership-specific advantages, location-specific advantages and internationalization advantages 8.3 International environment analysis (611 words) These involve factors which provides threat and opportunities for IKEA during its international business processes Economic system: it is all about the financial performance and trends over the years. The company has had a positive result since 2001 (figure 2). In 2013 its profits increased greatly. Differences in exchange rates among countries still remain a big concern IKEA. Legal/political factors & government intervention: laws of different counties require that IKEA must comply. However, the company does not pay tax since it is managed by non profit organization. Culture: Cultural differences influence customer perception in different 8.4 Conclusion (150 words): Confirmation of the thesis statement 8.5 References Read More