The Success of IKEA in the International Market - Research Paper Example

IKEA Contents Contents 2 Introduction 3 Methods of International Market Entry 3 Motivation for International Expansion 9 Retailers Expansion StrategyModels 13 Success of IKEA in the International Market 17 Conclusion 20 20 Reference List 21 Introduction In the current era, extent of competition among corporate firms has significantly increased with rise in scope and scale of business internationalization. The success of a business firm in the contemporary world can be analyzed from its nature of international business expansion and proficiency. This portfolio report tries to throw light on the business of IKEA, which is a multinational company of Sweden. The firm was first established in 1940 and engages in designing and selling assembled furniture. The headquarters of the firm is in Leiden, Netherlands. According to a research made in 2008, the company has been considered as the largest furniture retailing firm in the world. Overtime, proportions of discretionary spending of consumers in most economies have increased with rise in per capita. Such changes in composition of consumers’ expenditure have helped to enhance revenues of comfort product producing companies like, IKEA (Peng, 2010). Even so, it is also true that since the global financial crisis, aggregate income generated from the retail sector in the international market has fallen due to recessionary trails in economies. A very strong rival of IKEA, MFI Group Limited (a furniture retailing firm in U.K.) was forced to shut down its business during such critical conditions. So, since 2008, IKEA is facing strategic issues in business. The aggregate sales of the firm were recorded as 20.9 billion in 2009 and annual growth was approximately 1.4% since then (IKEA Group, 2013c). Rather, due to financial crunches, IKEA had to cut down almost 5000 jobs in 2009 (IKEA Group, 2013b). Thus, from the above analysis, it can be claimed that the company needs to frame appropriate productive strategies in business which will help it to expand the scope of business internationalization and increase revenue in the long run. The following context of the paper will study the strategic initiatives that are already undertaken by IKEA as well as suggest ways through which the company would be able to strategically grow in the long run (Twarowska and Kąkol, 2013). Methods of International Market Entry From the above context, it is evident that IKEA is facing problems since emergence of the financial crisis. The company lacks adequate manpower to enhance its overall productivity. Moreover, aggregate demand experienced in company’s domestic market has also fallen. This is evident from the annual report of the company. The gross revenue of IKEA was recorded as US$ 2583982 in 2012 and US$ 2406539 in 2011 (IKEA Group, 2013a). Even so, the liabilities in business were recorded as US$ 1085696 in 2011 and US$ 6394431 in 2012 (IKEA Group, 2013a). This proves that overall financial and economic status is on the decline in existing markets (Isaksson and Suljanovic, 2006). Organizations Strategic Plan Through its strategic plan, the company launches new types of products in its existing market and introduces its existing products in new markets. Only with the help of effective business product and process expansion, IKEA is able to sustain its position as the leading furniture retailer in the international market. In short, strategic plan of the company encourages a parallel development process. By virtue of this strategy, the company tries to develop its product as well as process patterns in business. The product expansion and development strategy is the company’s core competencies in business. In addition, almost 70% of the raw materials used in furniture produced by the company are recycled products. IKEA enjoys a long learning curve in business. So, strategic plan of the company follows a sustainable competition model; under this regime, new products are introduced on the basis of: Differentiation Cost Leadership Innovation Since 1960, the company has expanded across several markets through various modes of entry. Indirect Export Through this mode of entry, the company enters in new markets with minimum risk in business. However, through this process, the company does not acquire sufficient control over its business operations in new markets as such activities are conducted by another intermediate entity. The sales that that are generated from its foreign markets are treated as domestic sales. Direct Export Through this process, a firm conducts all its marketing activities in foreign markets. The exports are conducted by the company itself and are not delegated to other intermediaries. The factors that the company needs to consider under this mode of entry are: 1. Market contact 2. Market research 3. Physical Distribution 4. Export Documentation 5. Pricing Thus, this process of entry would involve higher degree of risk for the firm. Through the process of direct or indirect exports, the company supplies finished products to new foreign markets from domestic manufacturing sources. This involves high costs of transportation as exports are made in bulk. Costs related to custom duties and quotas on products of the company are high and render it less competitive in the international market. Contract Manufacturing Through this process, IKEA enters into a contract with a foreign firm only for manufacturing products. Even so, marketing and sales related activities of the product are conducted by the company itself. Licensing Thorough this process, the company enters in new markets with limited risks. This is slightly different from contract manufacturing process, given that it requires longer time and greater amount of responsibilities to be taken by local producers. The process of licensing is almost similar to that of franchising. The only difference claims that in franchising mode of entry, the owning company is more involved in controlling and developing marketing programme, unlike in the case of licensing. Through this process, the local producer (who produces on behalf of the firm in new markets) is allowed to manufacture the products of the owning firm through enactments of patent rights, copyrights, trademarks and knowhow on commodities. Joint Ventures Through this process, IKEA simply aligns its business operations with certain native companies in its new markets. Both the firms (host and home country organizations) in the venture would acquire equity and management voices in business through this process. It can be assumed that through joint venture partnership, IKEA and any other firm acts as a third new organization. The business risks are low in this process with assistance of the parent company in the new market (Campbell and Netzer, 2009). Nonetheless, the company enjoys the advantage of gaining experience about characteristic features of new markets in this process. The organization can also build good relationships with franchisees in the new marketplaces through in this mode of entry. Joint venture is perhaps the most popular form of market entry in the context of international management (McNally, 1995). Direct Investments Under this process, IKEA enters into new markets by making direct investments in some of the appropriate production units of such economies. This involves 100% commitment and involvement on behalf of the firm. Even so, it should be noted that such methods can be adopted by the company either through a merger or an acquisition (Schirone, 2006). Empirical Relevance IKEA had undertaken business expansion in international markets through directs investments in the initial years. Stores of the company in Norway, Germany, France and Scandinavian nations were constructed following such investments. Overtime, as financial reserves of the firm depleted, new inventions and expansions of business were made by the company through joint ventures. For instance, the company had formed a joint venture with the firm of Skanska in 1996 to sell BOKlok in Sweden. At present, the firm desires to sign up new venture contracts with firms in Nordic countries and U.K. for providing similar services in those nations. For selling and manufacturing its solar panels, the company has entered into a manufacturing contract with a Chinese company named Hanergy Holding Group Ltd. The Swedwood branch of the company primarily engages in manufacturing wood based products. However, the final products are sold across all market places of the firm through direct or indirect exports. Yet, it should be noted that since globalization, with the essence of international trade, certain developing economies in the world like, India, Brazil, South Africa, China and Russia, have been experiencing high economic growth rates. The per capita income levels and purchasing power of individuals in these nations have remarkably increased. Figure 1: Emerging Economies (Source: The World Bank, 2013) The above line graph shows that purchasing powers of all individuals in these nations are evidently increasing. If IKEA expands its business networks more extensively in these booming economies, then its commercial position can get enhanced. Hence, strategic plan of the company should consider expansion of the business in the BRICS nations (Harvey, 2001). So, according to its strategic plan for improving business, IKEA has utilized various methods of market entry patterns. Figure 2: Market Entry Modes (Source: Osland, Taylor and Zou, 2001) The above figure clearly shows the different types of market entry modes that can be adopted by the retail chain in order to accomplish desired objectives of its strategic plan in business (Dickson and Giglierano, 1986). The following table will indicate most feasible mode of entry that can be followed by IKEA to fulfil the requirements of its strategic plan for business expansion. Mode of Entry Feasibility Direct Export Not feasible, involves high risk Indirect Export Not feasible, lack of marketing opportunities Foreign Manufacturing Not feasible, large finances are required Assembling Highly feasible, company manufactures assembling furniture Contact Manufacturing Not feasible, lack of production related profit opportunities Licensing Not feasible, involves high cost in legal procedures Joint Ventures Highly feasible, involves low cost, lower risk; but high involvement and experience Direct Investments Not feasible, would require large finances Therefore, IKEA can enter into new international marketplaces either through joint ventures or assembling. Through the process of assembling, the company can easily produce intermediate products in its domestic market and finally, assemble and sell those in the new marketplaces. Motivation for International Expansion Since emergence of globalization and trade liberalization, extent of business internationalization has considerably increased across most nations. Figure 3: Increasing Scope of Business Internationalization (Source: Chu, Girdhar and Sood, 2013) The above figure shows that across most of the nations, degree of commercial international activities is higher than that of national commercial activities. However, it should be noted that among all nations, magnitude of international activities is highest in BRICS, comprising Brazil (95%), China (95%) and Russia (94%) (Chu, Girdhar and Sood, 2013). The trend in the above graph justifies the fact that contemporary firms are highly motivated towards international expansion. This is because domestic markets of the firm have become saturated; and international expansion has rendered the labour management process more feasible and real estate investment features more productive. Therefore following the global trend, IKEA should also leverage its capabilities to expand business in these new emerging markets (Suarez, 2006). Product Line Expansion If a multinational company desires to increase its market demand share and aggregate revenue, then it must implement product line expansion strategies in business. A product line is basically a group or collection of similar types of products or services. It works as a growth strategy for a company and can be undertaken in various forms. Upgrading the existing type of products, creating a completely new product or providing a new version of existing products are all different forms of product line expansion. When the life cycle of existing products of a company reaches the declining stage, the firm must implement ways to improve these products or to introduce new services or goods in the market. In addition, market opportunities can be utilized by a firm in a highly efficient manner through such resolutions. This helps to win over loyalty of consumers as well as to satisfy their needs and requirements in an effective manner. Owing to such allied benefits, companies in the contemporary world are remarkably motivated to implement product line expansion programmes in business (Gonzalez-Alvarez and Solis-Rodriguez, 2011). Product Line Expansion IKEA IKEA holds the position of being the greatest retailing firm in the industry. Even so, a substantial proportion of this success is dedicated to its product line expansion programmes. The company rigorously engages in product development initiatives under guidance of product strategy council (Suarez, 2006). The most effective product expansion programme introduced by the firm was its Flatpack houses. These houses are cheaper than traditional ones and hence, are more affordable for individuals whose disposable income has fallen due to recessionary trails prevailing in the market. Such houses sold by the company are also known as BOKlok. In September 2013, IKEA had announced to introduce new types of solar panel packages for houses; the manufacturing of these panels have been outsourced by the company. Therefore, from the above context, it can be claimed that IKEA’s brand value and revenue in business has substantially improved over time with the help of new product line extension programmes (Suarez, 2006). Saturation of Home Market If the domestic market where a company operates becomes saturated, then its productive resources can be exploited in other economies. Since globalization, it is found that growth rates of developed economies are quite lower than that of the developing nations. The severe negativities of the global financial crisis have altered economic prosperity of developed countries to a greater extent than that of developing nations. For this reason, a large number of multinational firms from developed economies have expanded their business operations in booming world economies (Guo, Zhao and Tang, 2013). Saturation of Home Market of IKEA In 1960, IKEA had realized that its domestic market was highly saturated. So, it would not have been worthwhile for the company to invest more funds in achieving higher market demands from a saturated market. Hence, 1960 onwards, the firm was motivated to expand business across international markets. The most common international markets of IKEA were the Scandinavian and European economies (Suarez, 2006). Favouring Resource Climate The multinational companies should make their decisions for business internationalization on grounds of theories related to transaction cost economies and resource based view. This implies that firms should outsource those segments of business over which they lack competitive advantage. Moreover, business branches of a company should be expanded in those economies where the resource climate is favourable. For instance, in emerging nations like, China, Brazil, India and Russia, youth unemployment rate is high. Perhaps, this is the reason for which labour resources are cheap in these economies. Also, since globalization, literacy rates of these nations are also on the rise and so is the quality of human capital. Thus, if multinational firms from western nations desire to open their business branches in abovementioned economies, then they would be able to employ cheap and efficient labour resource, thereby lowering commercial costs in business (Suarez, 2006). Favouring Resource Climate of IKEA IKEA is known to face several labour related problems in business. In context of its stores in U.S. and France, labour unions have claimed that the company’s behaviour towards workers is unjust. Considering such factors, it can be said that the firm is facing problems relating to labour resource. Even so, if IKEA establishes business branches in the emerging nations, then such labour related problems are likely to be eradicated to a great extent. Business growth will invariably take place in locations with favourable labour climate. If a company can manage its workforce effectively, then it would be able to enjoy higher productivity in business. In addition, good labour management boosts motivation of workers in workplaces (Lankashire, n.d.) Real Estate Investment The prices of real estate are quite volatile in the contemporary era. Investors often trade on real estate for speculative purposes. So, multinational firms must also engage in such investments in order to grab higher finances. It is found that in countries like, Brazil and China, the value of real estate is increasing at a fast rate. If a multinational company establishes its business branch in these nations through direct real estate investments, then it is likely for the business to multiply its worth in the long run and consequently, enhance net worth of the firm. Perhaps, this is the reason for which entrepreneurs of certain multinational firms consistently try to invest in productive real estate investments (Suarez, 2006). Real Estate Investment IKEA Until now, IKEA has undertaken a number of substantial business expansion initiatives. The company makes large amount of real estate investments in various nations, thereby extending its new business branches in multiple economies. For instance, in 2013, the firm had purchased real estate in Croatia, near Zagreb, in order to open a new warehouse. The company has also purchased lands in places like, Baltic States, for launching new stores. The size of these stores is expected to be more than 20000 sq feet. Nonetheless, apart from China, the company did not announce to make any substantial real estate investment in markets of Brazil, India or Russia. Since real estate values of such nations are rapidly increasing, it is most desirable for the company to purchase estates here. Otherwise, in the long run, cost of real estate investments or business expansion in such markets would be too high to be afforded by the company. Therefore, on grounds of product line expansion, real estate investment and business internationalization, IKEA has made considerable progress. However, if the company takes greater initiatives to expand in the emerging nations, then it would be able to achieve higher benefits in these lines and operate in a more favourable labour climate (Jonsson and Foss, 2011). It should be noted that IKEA can enjoy the advantages of international expansion only if it can leverage core competences in its business. The resource allocation activities of the firm must be efficient, which would in turn make product diversification (brand extension) activities of the firm successful. In both of its new and existing business branches, the company must encourage a participatory atmosphere in workplace. By encouraging such practices, the company would be able to amalgamate new logistics as well as marketing and operational strategies in business (Roger, Grol and Scoch, 1998). Retailers Expansion Strategy Models The expansion strategy of IKEA would fail to be successful without inclusion of appropriate strategic management approaches. The retail chain’s expansion strategies in business can become effective with use of certain strategic management models like, Ansoff and BCG matrix. This is because leveraging strategies of the firm can be studied in a more logical and comprehensive manner by employing certain strategic directional matrix analyses. Ansoff Matrix Model The Ansoff matrix model identifies various types of premeditated marketing decisions that the company can adopt, while undertaking the policy of business internationalization. This is also treated as an alternative to growth matrix. Products Markets Existing New Existing Sales of furniture, like, chairs, beds and desks. Household accessories Home appliances New Flatpack houses (also known as BOKlok). Solar panel packages that are used in houses and household mobile gadgets. New Sales of furniture, like, chairs, beds and desks. Household accessories Home appliances Restaurants and food stores (Source: Author’s Creation) Market Penetration Some of the established markets of the company are in Sweden, Netherlands and Australia. The company stores located in these places house more than 12000 types of products. However, it should be noted that only 1% of wood is used in products of the company. The rest of the raw materials are primary composed of recycled products. In these existing markets, the firm sells different types of household furniture and home appliances (Luxinnovation, 2008). Product Development IKEA had manufactured Flatpack houses in 1996 through joint venture with a company named Skanska. Such houses are extremely cheap and affordable compared to normal houses. The company has adopted this strategy after considering the recessionary trails in the market. Individuals with lower income find it feasible to purchase such low-priced accommodations. In addition, people across all nations have become highly conscious about protecting and preserving the environment. Guided by norms of energy transition, large number of individuals encourages using renewable sources of energy. Considering such situations, the company has introduced modern solar panels in its established markets; this has helped to grasp the growing consumers’ demand for eco-friendly products (Jonsson and Foss, 2011). The new mobile phones of the company are also experiencing positive response from the market. Market Development France, Germany, Qatar and Baltic States are nations where the company is expanding its business branches in the recent years. The firm is planning to set up new stores of more than 20000 sq feet in these countries. Diversification In some of the big stores located in new markets, the company has been opening up new restaurants and food stalls. Such attractions are introduced by the firm so as to ensure higher number of visitors and henceforth, higher sales (Li and Vinten, 1997). The researcher has already claimed that IKEA’s strategic plan should promote a parallel development process. If decision of the firm regarding strategic expansion is compared to strategy of diversification, then it can be stated that the company is excelling in terms of product development. Then again, its expansion process is not entirely perfect. IKEA should try to explore the booming economies of the world. Additionally, in the recent years, the company has extended its business in China. This is because there are large stores of the company located in Shanghai, China (Johnson, 2013). With the help of a Boston (BCG) matrix, productive resource allocation strategies to be adopted by the company are figured out. Relative Market Share Relative Market Growth High Low High Flat pack homes Solar panels Low Home accessories, appliances and furniture Mobiles and restaurants (Source: Author’s Creation) Stars The star product of the company is its flat pack houses. This is because such houses are cheap and customers whose disposable income has declined due to recession find such products to be affordable and useful. Since market demand share and growth rate of demand for this product is highest, the firm should apply new strategies whereby sales in both new and existing markets can be enhanced (Froot, 2008). Question Mark The company experiences relatively lower market demand for its solar panels. However, overtime, individuals are becoming more conscious about protecting the environment and seem to prefer eco-friendly products. So, considering such factors, IKEA can experience high revenue in future from sale of solar panels (Jonsson and Foss, 2011). Cash Cows The existing established products of the company, like, furniture and household appliances, are already popular in the market. The company enjoys a high share of market demand for such commodities and perhaps this is why it is considered to be the largest furniture retailer in the industry. Nonetheless, this market is already saturated and the company is less likely to experience higher growth rate of market demand from sale of such items (Papalexandris and Galanaki, 2009). Dogs The company cannot easily gain expertise in providing restaurant services in markets. This is because it is a very small player in the hospitality industry and lacks appropriate competencies to become a proficient entity there. At the same time, it will be a serious challenge for the firm to increase earnings through sale of mobile phones. There are giant multinational companies like, T-Mobile, Sprint, Samsung and Apple, who act as monopolistic leaders in such industries. So, it would not be easy for IKEA to expand its business on lines of such services and products (Davis and Steil, 2001). Success of IKEA in the International Market The firms in the furniture industry, like, IKEA, did not flourish with benefits of international trade, following the emergence of globalization. This is because through international trade, these firms experienced high transportation costs, given that furniture are huge in volume. The proportions of shipment damages were also high. So, profits of these companies from sales of furniture were considerably less than its cost involved in the international marketplaces. However, IKEA is an exception in the industry; since 2002, the company has attained the brand image of world’s biggest retailer with the help of its international market expansion strategy. In 2002, it was found that the company owned 160 stores across 30 nations around the world (Kaye, 2013). However, the company had claimed to achieve a wide base of customers in the global market with the essence of uniquely designed home furnishing products that are sold to customers at highly reasonable prices. The company was established in Sweden in 1940; but by 1960, its Swedish market was saturated and the firm had decided to expand business beyond the domestic borders (Kaye, 2013). The internationalization strategy of the firm in the Scandinavian and European nations did not consider tastes and preferences of the native consumers. While expanding its business branches in such nations, the company had undertaken few strategic measures by virtue of which costs involved in operating across new marketplaces could be lowered. Nevertheless, it is claimed that the company’s insignificant responsiveness to local requirement strategy was highly worthwhile in its European markets. The company had faced its first challenge in business internationalization while entering in the market of U.S. in 1985 (Kaye, 2013). The primary cause of the problem was company’s negligence towards needs and requirements of the local customers. The customers of U.S. preferred large furniture for both household and corporate requirements; whereas, furniture manufactured and designed by the company were highly portable in nature. Since then, the company realized that its standardized product strategy had to be modified to incorporate flexibility, while operating in the local markets. Finally, after redesigning its strategy, IKEA had launched its products and services in the U.S. market in 1990 for the second time. The new flexible strategy of the firm was highly effective in U.S. from 1990; and by 2002, almost 19% of the aggregate revenue generated by IKEA was procured from the U.S. markets (Jonsson and Foss, 2011). From the above analysis, it can be stated that IKEA does not usually change its corporate strategy while operating across various markets and does so only if absolutely required. Thus, from the abovementioned internationalization strategy of IKEA, it can be stated that the best corporate operational formula of a multinational company in its domestic market may not be effective across other international markets. Since tastes and preferences as well as internal and external business environments across different markets are dissimilar, corporate strategies of a multinational firm, like, IKEA, should be formulated on adaptation and not standardization (Kaye, 2013). Figure 4: IKEA Business Internationalization (Source: Harapiak, 2013) A primary internal strategy that was adopted by the company was related to cost efficiency. Since inception of its business internationalization, IKEA had significantly tried to achieve economies of scale in production. By virtue of this, the firm lowered its average output cost and sold products at lower prices relative to that of the competitors. Some researchers claim that IKEA’s business internationalization strategy draws inspiration from Winter and Szulanski’s two stage model of business internationalization. This is because the strategy, at present, experiences exploitive character, instead of exploratory features. IKEA has been successfully expanding its business across internal markets. It is a prominent multinational firm in the contemporary retail industry. The company is regarded as more efficient than other renowned retailing firms like, WalMart, Starbucks and Apple. Such claims are made because the company has grown extensively beyond its domestic markets since its inception. IKEA has implemented a successful adaptive business model and acquired a successful formula for profitability and growth across multi-markets. From 1960 to 1980, the company had implemented an explorative internationalization strategy. From 1980 to mid-1990s, the company implemented rigid replication strategy and since 1990, the company has been operating on grounds of flexible replication strategy. Hence, it is expected that in the long run by establishing its business branches in emerging nations of the world, the company would be able to sustain its position in the global forum, regardless of problems associated with recession and crisis (Bartucca, n.d.). Conclusion From the above portfolio analysis, it would be correct to conclude that IKEA is a popular retailing multinational firm in the international forum. Then again, it should be noted that with contribution of its efficient strategic management practices, the company has sustained its unique status in the commercial world (Orozco, 2001). Cost effectiveness, differentiation and innovation are three factors via which the company has strategically extended its scope of business internationalization. IKEA had implemented standardized strategies in its initial stages of business expansion; and over time, the company has transformed its international expansion strategy into one at highly adaptive and flexible level. However, since occurrence of global financial crisis, as observed from the company annual reports, growth rate of IKEA’s profit has fallen along with rise in revenue. At this juncture, it is likely for the organization to expand in emerging economies of the world. If the company extends its business branches in nations like, Brazil and India, then it would be able to operate within a better labour climate. The net worth of its business in such nations would also increase in the near future as real estate values of these nations are rising at a fast pace. In addition to that, the product line expansion strategies, along with international expansion strategy, are worthwhile and accurate. Hence, with abovementioned strategic changes, IKEA would surely prosper in the long run and sustain its leading position in the retailing world (Stryker, 1998). Reference List Bartucca, N., n.d. Contemporary marketing strategy. [pdf] Middlesex University. Available at: [Accessed 27 March 2014]. 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