IKEA Communications in Chinese Market - Essay Example

? Communication in Business Table of Contents Executive Summary 3 Introduction 3 Terms of Reference 4 Overview of the Situation 5 Overview of Company5 IKEA in China 5 Analysis of the Situation 7 PESTLE 7 Cultural Differences 9 Strength and Weaknesses of IKEA in China 11 Solutions and Recommendations 12 Forecasts and Outcomes 14 Reference 15 Executive Summary This paper presents an analysis of IKEA’s business in Chinese market. IKEA is a Sweden company and it entered in China during 1998. China is a developing nation and its economic strength in increasing at higher rate attracting significant number of FDIs in this county. IKEA has successfully established its business in China. IKEA is a European company and its business and organisational culture differs with Chinese culture. Hence, it has to face multiple hindrances in controlling the Chinese market. Besides, the government’s trade policies for MNCs are another major issue for IKEA in offering lower cost product and hence, it becomes difficult for the company to compete with other domestic furniture manufacturing companies. There are two major problems in IKEA for its China market that includes cross cultural communication gap and government policies. In this process, the primary aim of IKEA is to understand the core Chinese culture which must be blended with IKEA organisational culture. Understanding of local culture is inevitable for IKEA. Therefore, it should develop its internal organisation’s culture and communicational process by implementing integrated marketing communication model. It also needs to achieve higher efficiency of its multinational teams, and IKEA should try to increase the number of Chinese employees to understand and convince target consumer group. Besides, government’s support is also very essential for IKEA so it must increase its activities relating to corporate social responsibility. Introduction Globalization has brought significant changes in human activities and their lifestyles. It has led to accelerate the growth and development of entire world economies and societies. Trade and business activities are one of the most crucial areas that have experienced tremendous growth since last two decades. The increasing global exchanges enhanced the importance of international trade and policies. Besides, the business agreements and treaties have facilitated the international communication and business activities. These reasons have provided greater opportunities to business organisations and hence, they keep expanding their geographical boundaries i.e. in overseas market. However, in this process, multinational companies (MNC) have to counter certain hindrances that affect efficiency of management. Cross cultural diversities and communication gap are the major challenges for MNCs (DuBrin, 2008, p.66). This paper will attempt to analyse a case of a multinational company facing hindrances in managing its international division ion a culturally diversified country. This paper will analyse major factors behind such issues and will provide a relevant solutions and recommendations. Finally, the entire discussions, analyses and outcomes will be concluded. Terms of Reference This paper will provide a description and solutions of problems faced by IKEA in Chinese market due to political, social and business cultural differences. IKEA is a world renowned furniture manufacturing company and it has expanded its market in China. Currently, this multinational company is facing problems in its Chinese market and hence, it has asked to prepare a report addressing the major causes for such issues in China. The company also needs proper strategic solutions and recommendations to counter these issues facing in Chinese market. Overview of the Situation Overview of Company IKEA (Ingvar Kamprad Elmtaryd Agunnaryd) is a Sweden based, private holding multinational company and it is the largest furniture manufacturer in entire UK and Europe. The company was founded by Ingvar Kamprad during 1943. Initially, IKEA used to sell pens, tables, picture frames, wallets, jewelleries etc. During 1948, the company started manufacturing and selling furniture and it opened its first furniture showroom in Sewed during 1953 (IKEA-a, 2010). The company is primarily influenced by the traditional Sweden heritage. During the inception of IKEA, the Sweden society experienced a transitional period as it was becoming an ideal caring society. Hence, the company’s core value is to fulfil the customers’ need by delivering innovative products and high quality services (IKEA-b, 2010). The company has developed its business ideas and policies that comply with traditional Swedish culture. IKEA’s vision is to “create a better everyday life for the many people” (IKEA-c, 2010). In this respect, the company focuses on three main areas i.e. product range, low prices and offering better life to its stakeholders. The company has also realized its responsibilities towards the society, community and environment. IKEA has been experiencing very high growth since last ten years and it has been able to triple its overall revenue since 1999 (IKEA-d, 2009). IKEA in China During late 1990s, the company started expanding its business and it entered in Chinese market in 1998. It opened its first retail store in Shanghai with a space of 32,000 m2. China is one of the fastest emerging retail markets and IKEA has able to identify this opportunity. At present, IKEA has established its eight stores in popular Chinese cities like Beijing, Shenzhen, and Dalian etc. Gradually, the China has become a very important market for IKEA due to raising consumers demand and their increasing standard of living. Initially, IKEA faced several challenges in Chinese market due to its Western image. The consumers perceived its product as expensive brand. The company was not able to offer lower prices due to unfavourable business policies of Chinese government. Therefore, IKEA entered in Chinese market by following joint venture policy. Besides, IKEA found it difficult to match its core Swedish business culture with prevailing Chinese culture (Chaletanone and Cheancharadpong, 2008). In spite of high growth of Chinese market and consumers’ demand, IKEA has not been able to generate significant amount of revenue from its Chinese and Asian market. The following figure shows sales as per region of IKEA. Figure 1: Sales per Region (Source: IKEA-d. 2009) Currently, IKEA is planning to expand its business in China. “The company unveiled projects including a sprawling shopping destination in Beijing, which will house 450 brands alongside the main attraction of the city’s second IKEA store, set to open in 2014” (The Local, 2009). In this process, the company is expected to settle down its issues in China relating of cross cultural and business cultural communication gap. Analysis of the Situation In order to diagnose the underlying issues of IKEA in Chinese market, it is necessary to analysis the various factors affecting IKEA business in China. The macro environmental factors are very crucial that plays very significant role influencing IKEA’s business in China. In this process, PESTLE, SWOT and cultural dimensional models are very useful. PESTLE PESTLE analysis is an effective analytical model for assessing the macro-economic factors affecting an industry or a company. This model includes six major areas of an economy and it includes political, economic, socio-cultural, technological, legal and environmental. The PESTLE analysis of Chinese market has been explained below. Political: Political condition of china is stable as the government has the highest authority to control the entire affair. The Chinese Government is a communist led party and it is responsible for bringing growth and development within the nation by maintaining peace. The government policies have been able to bring economic prosperity within the country by following protective policies to resist exploitation of domestic trade and market. However, the Chinese government policies have been criticised for unreasonable restrictions for foreign traders (Ensinger, 2010). Economic: China has become one of the fastest growing economies in the world. The industrialization is the major area that has brought vital developments in this country. Industry and services sector have contributed 46.3% and 43.4% respectively towards the growth of total GDP. The purchasing power parity of China has increased to $8.818 trillion which is the third highest in the world. Per capital GDP is quite low i.e. $6,700 due to the highest population. However, this country has the highest labour forces and hence, the labour cost is very low. Due to rapid and high economic progress, it has become the most favourable market for making FDIs (CIA, 2010). Socio-Cultural: China has the highest population in world and that has led to create the largest consumers base in this country. Influence of traditional Chinese culture on its people and business is very prominent. Besides, the economic condition of people, their social background, age and education also affect their behaviour. Currently, total population in China is 1,330,141,295, and 72.1% of total population belongs to 15 to 64 years old. The literacy rate of China is 91.6% and female literacy rate is lower than male literacy rate (CIA, 2010). Technology: Technological development in China is a major factor behind its rapid industrialization. Chinese business leadership is primarily concerned with innovation and science. This has led to create greater opportunities in Chinese business environment. The infrastructural advancement is major strength for trade and business in this country (U.S. Department of State, 2010). Legal: Chinese legal system poses strict rules and regulations for every citizen and it is stricter for the multinational enterprises. Chinese legal is system is based on providing equal and mutual judgment and facilities. However, these policies have led to create barriers for foreign traders. Environment: Considering the global environmental concerns, the Chinese government has developed proper benchmarks for industries to meet environmental obligations. It has founded national departments called State Environmental Protection Administration (SEPA) and the Ministry of Environmental Protection (MEP) for protecting environment (U.S. Department of State, 2010). Cultural Differences IKEA is a Swedish company and its organisations are influenced by the traditional Swedish culture. Hence, IKEA may face cross cultural differences in China market. Therefore, it is necessary to analyse and understand the various cultural dimensions of China cultural and its differences with Swedish culture. In this respect, the cultural dimension theory explained by Geert Hofstede is very important. Hofstede have indentified five major cultural dimensions for describing socio-cultural characteristics of a specific country. These five cultural dimensions are Power Distance Index (PDI), Individualism (IDV), Masculinity (MAS), Uncertainty Avoidance Index (UAI) and Long-Term Orientation (LTO). The following figure represents a comparison between Chinese and Swedish culture. Figure 2: Five Dimensional Model and com (Source: Geert Hofstede – itim-a, 2009) As per the above figure, it is observed that there are significant differences between two nations as their orientations are different. Higher PDI in China represents that the Chinese leaders holds major controlling power. The government of China and leading political parties are the major leaders of this country who are responsible to regulate the entire country. This also implies that Chinese society offers more importance to the privileged and wealthy class of people. The individualism is lower in China comparing to Sweden. This explains that the influences of communist ideology on Chinese culture are very high. Generally, Chinese people believe in collectivist culture and hence, the important of family is very high in China comparing to Sweden. High MAS of China depicts the high gender discrimination in society. Male dominancy is very high in the Chinese society; whereas, Swedish society offers equal chances to female and male society. Long term orientation is higher for China comparing to Sweden. Higher LTO is a common feature for all Asian countries. This dimension is mainly derived by the Confucius philosophy and its influence on China is prominent. The high LTO of China “indicates a society's time perspective and an attitude of persevering; that is, overcoming obstacles with time, if not with will and strength” (Geert Hofstede – itim-b, 2009). Strength and Weaknesses of IKEA in China IKEA has been present in China since 1998 and it has developed its separate sister company for its Chinese market called Inter IKEA Centre Group (IICG). IKEA has found greater opportunities in the Chinese market, and hence, it needs to identify its potential strengths and weakness to cater these opportunities. Major strengths and weaknesses of IKEA in China are discussed below. Strength: Core business policies and ideas are major strength for IKEA. In spite of unfavourable Chinese business policies, the company has been able to manage in this market. The company has captured a significant market share by offering innovative products to Chinese consumers. IKEA has already established its eight retail stores and it is planning to expand its market in China. Weaknesses: The major weakness of IKEA in China is the business cultural differences. It has led to create communicational gap between its business and Chinese market. The expatriate managers of IKEA are facing difficulties in controlling the market. Language differences are another major factor for this communication gap. Another problem for the company is product price. Due to government’s regulations, it is not able to provide low cost products to Chinese consumers. Moreover, domestic furniture manufacturers are able to produce cost effective products that leads to intensify competition for IKEA (LIU, 2008). Solutions and Recommendations On the basis of above analyses and discussions on prevailing issues for IKEA in Chinese market have figured out its major challenges. The primary issue for IKEA is the cultural differences between its core organisational culture and Chinese market that leads to create cross-cultural communication gaps. It also caused lack of motivation for expatriate managers and other employees of IKEA in China. Secondly, the government policies relating to excise duty and tax are causing high cost of product for IKEA. The second issue is an external challenge for IKEA, and in order to resolve this, the company has to concentrate on first issue related to cultural differences and cross-cultural communication gap. For this, IKEA has to increase its multinational team’s effectiveness. Integrated marketing communication (IMC) is supposed to be one of the best communicational models for business organisations. The primary aim of IKEA is to create awareness regarding Chinese culture in its organisation by offering proper trainings and motivation. Hence, IKEA should implement IMC for its Chinese market. IMC strives to enhance the cross-functional communications that is very important for IKEA to develop a collectivistic organisational culture to comply with Chinese market. IKEA may develop a model that will upgrade its multinational teams’ effectiveness. Aqeel Tirmizi has developed a universal model for enhancing teams’ efficiency level. The following figure represents this model. Figure 3: Multicultural Team Effectiveness Model (Source: Halverson and Tirmizi, 2008, p.10) The above model includes entire factors that affect IKEA’s business in China. These are social & institutional, organisational, teams and its climate. The primary aim for IKEA is to create satisfaction, learning and high team performances. Another major problem for IKEA in cross-cultural communication is the language barrier. The Chinese language is one of the toughest languages in world which is unknown for expatriate managers of IKEA in China. IKEA must provide proper training to educate managers regarding Chinese culture and language. IKEA should also try to develop its marketing mix i.e. product, price, place and promotion that will combine and reflect traditional Chinese culture. Some relevant recommendations have been suggested to IKEA for its business in China. IKEA must provide proper training to its employees and expatriate managers regarding Chinese culture and language. IKEA must implement IMC model and concentrate on enhancing multinational team effectiveness. It should develop ‘two-way’ communicational system with consumers and with its employees. It should to recruit more number of Chinese employees specifically for the marketing activities, as they can easily understand the requirements of Chinese culture and its people. The marketing mix strategy must consider the basic Chinese culture and hence, the promotional mix like advertisements should reflect the core Chinese culture. It should try to achieve governments’ attention by conducting social improvement programs. It must try to bring development in Chinese society by offering its volunteer services. This will enhance its reputation in Chinese market and government may offer benefits to IKEA. Forecasts and Outcomes The analyses on IKEA’s business in China have disclosed major influencing trends of Chinese market. Chinese people are mainly influenced by traditional Chinese culture. Besides, the increasing economic condition of China is also a major factor that has brought significant changes in Chinese people. With increasing industrialisation and consumers’ demand, the Chinese market for furniture is expected to grow at higher rate in coming years. The economic condition of Chinese people is enhancing, and their purchasing power has become stronger. Therefore, IKEA is expected to counter a greater opportunities in Chinese market. However, in order to cater the increasing opportunities, the company has to restructure its management style and needs to understand the underlying requirements of Chinese culture. In this respect, IKEA must adopt business styles followed by the domestic companies. The above suggested recommendations strive to create cross cultural awareness in IKEA regarding Chinese culture. Besides, it will also help to clarify the myths regarding Chinese market and consumers. IKEA needs to employ more Chinese employees who are capable to convince the Chinese consumers. Successful implementation of above stated recommendations will assist the company to gain support from Chinese government. Hence, IKEA may enjoy tax and excise duty benefits which are very necessary for IKEA in offering cheap products. Reference Chaletanone, W. and Cheancharadpong, W. June 08, 2008. Internationalization of IKEA in the Japanese market and Chinese markets. [Pdf]. Available at: http://mdh.diva-portal.org/smash/get/diva2:121496/FULLTEXT01. [Accessed on January 12, 2011]. CIA. December 29, 2010. The World Factbook: China. [Online]. Available at: https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html. [Accessed on January 12, 2011]. DuBrin, A. J. 2008. Essentials of Management. 8th ed. Cengage Learning. Ensinger, D. May 17, 2010. Chinese Restrictions Hurting Multinational Companies. [Online]. Available at: http://www.economyincrisis.org/content/chinese-restrictions-hurting-multinational-companies. [Accessed on January 12, 2011]. IKEA-a. 2010. 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