The Various Options of International Market Entry Strategies for IKEA in South Korea - Essay Example

Marketing Introduction This report is dedicated to providing an evaluation of the various options of international marketentry strategies for IKEA in South Korea. An analysis of the various options available to the company will be done in the report by considering a set of internal and external factors that may influence the choice of market entry of the company and its products. The researcher will then draw a conclusion by recommending the most suitable approach that the company can use in the entry of its product into the South Korean market based on the findings of the research. The data used in the identification of the internal and external factors was obtained from a report by the Korean Government and internal analysis by IKEA on its profitability and strengths. This internal-external analysis of factors is provided in full in the appendix section of the paper with close references in the body of the report. The researcher’s indebtedness to foreign literature and ideas is shown in the text (in text citations) and in full in the bibliography section of the study. Direct Exporting Direct exporting forms the most basic mode of exporting that IKEA can use in the entry of its products into the Korean market (Doole & Lowe, 2008). Based on the strong financial performance of the company in the previous year, IKEA can successfully enjoy from reduced costs due to economies of scale from concentrated production in the home country by directly exporting its products into the Korean market and subsequently enjoying control of the distribution chains. The company can either use sales representatives or importing distributors in the Korean market. The sales representatives will be comprised of foreign suppliers and manufactures of the IKEA products in the Korean market working for an established commission of sales (Lymbersky, 2008). This will be advantageous to IKEA as the sales representatives will provide support services in the foreign country. Importing distributors can be used by the company to purchase the products directly from IKEA in their own right and resell these products in the Korean market as wholesalers, retailer or a mix of both. These importing distributors are best suited for entry of products that are carried in inventory such as the appliances and furniture products manufactured by IKEA. Franchising A franchising agreement is a system in which a semi-independent business owner (franchisee) pays royalties and fees to a parent company (franchiser) in return for the right of identification of the franchisee to the trademark, sale of goods and use of business system and format (Terpstra & Sarathy, 2001). IKEA can use this method of market entry into South Korea by capitalizing on the performance of the Korean economy. Due to the high rate of investment in the country, IKEA can benefit from reduced costs of market entry by identifying potential investors and businessmen in South Korea and selling them the franchise agreements. This will benefit the company by reducing the cost of the market entry. Franchise agreements are also characterised by longer duration of time. The parent company also provides a broader package of resources, rights and equipments. These are the main characteristics of franchising that differ from licensing. Through franchising, IKEA will provide operational manuals, training of staff, managerial systems and equipment to the franchisees in South Korea. The IKEA brand and product may be successfully adopted in South Korea through franchise agreements with local business men and investors. Licensing An international licensing agreement gives consent to foreign firms to manufacture a proprietor’s product for a fixed term either exclusively or non-exclusively in a specific market (Terpstra & Sarathy, 2001). This foreign market entry strategy allows a licensor in their home country to make limited resources or rights available to the licensee in the host country. The resources and rights may include trademarks, patents, managerial skills or technology which makes it possible for the licensee to manufacture and sell the products of the licensor in the host country. This mode of entry may benefit IKEA as it will not require them to open new ventures and operations in South Korea. IKEA can establish potential investors with the funds and interest in their mode of business to provide license agreements that will allow the licensee produce IKEA’s products in South Korea with the exact same quality as those produced in the host country. This expansion strategy will be less costly to IKEA; however, it may pose a threat to the business as the company will be required to share a lot of sensitive information and processes with the licensee. Conclusion The most suitable strategy that IKEA may employ in the expansion of its business in South Korea is engaging in franchising agreements. As opposed to licensing, franchising agreements only let the third party into the operation and way of business of the company, as opposed to sharing of intellectual property and trade secrets. Franchising will also ensure that IKEA spends less cash in entry into South Korea as compared to market entire strategies such as direct exporting. Furthermore through franchising, the company will enjoy returns in the form of royalties for the franchisees. The method will also shield IKEA from any unforeseen political risks that may arise in South Korea. Through franchising, IKEA can ensure simultaneous market entry into South Korea and other regions of the globe. By selection of the best suited partners, IKEA will stand to benefit from financial investment as well as diversified managerial capabilities in the operation. References Bengtsson, S. (2010). IKEA, the book: designers, products and other stuff. Stockholm, Arvinius. Dahlvig, A. (2012). The IKEA edge: building global growth and social good at the worlds most iconic home store. New York, McGraw-Hill. Data Monitor (2014). Republic of Korea: Country Analysis Report – In-depth PESTLE Insights. Retrieved from: https://www.kdevelopedia.org/download.do?timeFile=/mnt/idas/asset/2012/01/30/DOC/PDF/04201201300000234070791.pdf&originFileName=PESTLE%20ANALYSIS.pdf Doole, I., & Lowe, R. (2008). International marketing strategy: analysis, development and implementation. London, Cengage Learning. IKEA (2014). Kitchen Appliances. http://www.ikea.com/us/en/catalog/categories/departments/kitchen/ IKEA (2013). Strategic Management: SWOT analysis of IKEA. http://www.strategicmanagementinsight.com/swot-analyses/ikea-swot-analysis.html Lewis, E. (2008). Great IKEA!: a brand for all the people. London, Marshall Cavendish. Lymbersky, C. (2008). Market entry strategies text, cases and readings in market entry management. Hamburg, Management Laboratory Press. Terpstra, V. and Sarathy, R. (2001). International Marketing, 8th edn, Chicago IL, Dryden Press. Appendix Introduction IKEA is a Swedish company registered in the Netherlands, which designs and sells furniture such as beds, chairs, desks, kitchen appliances, and general home accessories (Bengtsson, 2010). The company sells ready-to-assemble furniture. IKEA was announced as the largest furniture retailer company in 2006 (Dahlvig, 2012). The company is globally known for its creative and modern architectural designs for various types of furniture, appliances and interior design (Dahlvig, 2012). Such designs are usually associated with eco-friendly simplicity. The firm is also known for its close attention to cost control, product development and operational detail. Due to these attributes, the company was able to lower the prices of its products by an average of between two and three percent over the past decade until 2010 during its period of global expansion. The company currently focuses on global expansion and entry into new markets. The product of choice is IKEA’s compact kitchen items and the targeted country is South Korea. Before expanding into such a foreign market, the company first needs to consider a set of internal company factors and external factors that may affect the entry of the company and product into the target country. These internal and external factors may affect the company’s choice of market and market entry strategy. Internal Company Factors The internal factors within a company are the first consideration that a company takes before entry and penetration into a new market. These factors are of great importance as they will dictate if the company is ready for entry into a new market. Furthermore, these factors enable the management of the company forecast the possible outcomes of the entry and prepare to meet any operational and financial challenges that may arise in the foreign country. As of December 2013, IKEA recorded revenue of € 27.628 billion with a profit of € 3.202 billion (IKEA, 2014). With such revenues, the company is liquid enough to finance the successful entry of the country in South Korea. The company can expand into the international market by using the direct exporting strategy due to this strong financial capability. IKEA constantly uses innovation to drive costs down (IKEA, 2013). The company will be able to provide their new clients in South Korea low prices of its compact kitchen assortment of products at considerably low costs. Low prices form the cornerstone of IKEA’s business model (IKEA, 2013). The company also has a diversified product portfolio. In South Korea, the market is highly receptive to new innovative products and ideas. Through the innovative teams at IKEA, the company can successfully produce innovative products that will suit the Korean market. The company is also committed to creating long lasting supply chains with its suppliers (IKEA, 2013). This enables the company order its raw materials in bulk and enjoy reduced costs due to economies of scale. This good rapport with suppliers can be a useful strategy in the Korean market where the company can benefit greatly from reduced costs of raw materials if its settles for a joint venture in the country. To maintain the price of their goods, the company can engage in licensing agreements to ensure that the goods produced in South Korea are produced at low costs but maintain the exact same quality according to the company’s standards (Lewis, 2008). External Company Factors After a keen analysis of the internal factors that may affect the entry of a company into new market, the external factors need to be carefully analysed to ensure the company is ready for venturing into a new country. For IKEA, this is an important step considering the company is of European origin and seeks to expand into Asian territories. The economy of South Korea is a growing and promising economy (Data Monitor, 2014). The country is characterised by the fast growth of multinational corporations and investments in all sectors of the economy (Data Monitor, 2014). The country has enjoyed political stability since it became a democracy (Data Monitor, 2014). The country has a low population with low fertility rates. This has resulted into an aging population in the country. Due to the age of this population, healthy living is highly encouraged (Data Monitor, 2014). These individuals need to eat healthy meals at all times. IKEA has identified a niche and seeks to capitalize on this opportunity by entering the South Korean market and selling its compact kitchen; a package that comes with an assortment of easy to use, energy saving and stylish kitchen appliances. With such products, the population of South Korea can comfortably prepare their healthy meals at homes as opposed to buying from fast food restaurants and ordering takeaway meals from different restaurants. The South Korean economy is continually influenced and strengthened by the government. The economic structure of the country is well supported by the government. Due to the strong economic reforms, the country continues to experience steady economic growth. The country is the 12th largest economy on the globe with an economic growth rate of 5.4 percent as at 2013 (Data Monitor, 2014). This has resulted to benefits from both international and foreign investment in the country. Individuals investing into the South Korean market seek to expand their investment options form the heavily invested manufacturing and technology to such options as interior design and decor. This opens a great opportunity for IKEA to expand its business into the country and consider such options as licensing and franchising to harness the opportunities of expansion from the readily available investors in the country. The South Korean labour force is characterised by a well educated and technically qualified personnel with generally higher wages than the neighboring countries. The minimum wage payable in the country is $3.84 per hour, $30.74 per day and $868.27 per month (Data Monitor, 2014). The country enjoys rapid urbanization. Due to these factors, the population is likely to readily accept the products from IKEA as they have the purchasing power and they embrace innovation and modernization in their culture; something that IKEA’s products fulfills. Summary The South Korean market provides a prospective target and market for IKEA’s furniture products. The IKEA brand is known to sell quality products at low prices a provision that will be highly appreciated and loved by individuals in the Korean market. The internal company factors and external market factors in South Korea play an important role in the expansion of the company into the country and may greatly influence the market entry strategy adopted by the company. Therefore, cohesion between the two diverse factors needs to be established to facilitate the smooth entry of the company into the Korean market. Read More