EM-516: International Business

Global Business strategy of IKEA

Submitted to:
Mehnaj Afrin
Assistant Professor
Department of Management
Dhaka University

Submitted by:
Name ID
Lutfun Nahar Dona 3-18-40-044

Date of Submission: 24th November, 2020

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 Global Business strategy of IKEA

Ikea entry mode in international market:

Ikea choose Wholly owned Subsidiaries and Franchising as their best option to enter global
market.

Wholly owned Subsidiaries:

Wholly owned subsidiaries offer the most control and the highest level of risk and cost.IKEA use
wholly owned subsidiary as their main expansion. The IKEA corporate structure is divided in to
two parts which are operating and franchising. The main purpose of the IKEA use this expansion
strategies is to ensure operational control, standardization, and provide a smooth entry into to a
new market. The attractive way to use wholly owned subsidiaries is where IKEA can reduce the
risk of losing control over their core competence and its concept. Wholly owned subsidiaries also
required IKEA to realize location and experience curve economies. This which means, IKEA
able to achieve economic of scale by manufacture more products and reduce the average cost of
products. Indirectly, this also fulfill the IKEA porter generic strategies which is cost leadership.
wholly owned subsidiary strategy is highly expensive choice for company that would lead to
severe financial risk if not successful. IKEA have to bear the full costs and high risk by
themselves of setting up the factories, stores and retail shops operations in other nations

Advantage:

1) The parent organization can exert full control over its operations in a foreign nation.
2) The parent organization does not require to reveal its technology or competitive
advantages to others as the parent organization looks after the whole activities of
subsidiary all alone.

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Disadvantage:

1) The parent organization needs to make 100% equity investment in its subsidiary.
Subsequently, this type of international trade is, not reasonable for little and medium-size
organizations which have limited assets with them to put resources into foreign nations.
2) Additionally, the parent organization needs to tolerate the whole misfortunes coming
about because of losses of its foreign activities on its own, as it owns 100% equity.
3) A few nations are hesitant to set up entirely owned subsidiaries by outsiders in their
nation.

Franchising Strategy:

IKEA mostly approaches unknown, relatively small and high-risk markets by franchising.
Serious applicants are carefully researched and evaluated and franchises are granted only to
companies and/or individuals with strong financial backing and a proven record in retail.
franchisees have to carry basic items, but are given the freedom to design the rest of the product
mix to fit local market needs. the basic core items number approximately 12,000 simple and
functional products. the centralized head office is actively involved in the selection processes and
provides advice. In addition, all products have to be purchased from IkEA’s product lines. In
order to maintain service, quality and logistic standards, individual franchisees are periodically
audited and compared with overall corporate perform- ance. Extensive training and operational
support are provided by the headquarters. All franchisees pay franchise fees to IkEA holdings.
All catalogues and promotional advertising are the responsibility of head- quarters. franchising
has been used as a vehicle for the company’s generic focus strategy.The franchisees have the
right to operate IKEA store under the franchise agreements in accordance with franchisor's
systems and methods to use IKEA trademarks establish by Inter IKEA Systems. Besides, IKEA
franchisees able to access to the product range of IKEA and opportunity to continuously take
part in IKEA concept development in their own stores. (Inter IKEA Group, n.d.). Then, IKEA
franchisee has its own responsibilities to manage, develop and run their local market business
with efforts after granting the rights of IKEA concept.

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Advantages:

1. Rapid expansion of sales markets, the increase in sales volume and the territorial
expansion of the business

2. Absence of the cost of the vertically-integrated network management (reduction of

3. A lower level of own capital investment

4. Lift the prestige of the company and its trademark, recognition from the customers,
increased confidence in the quality and range of products a single company

5. Income from the sale of the license and renting real estate franchise and equipment

6. Profit from lending opportunities franchisees and reducing the time of turnover.

Disadvantages:

1. The likelihood of a smaller part of the profits from the franchise business than on their
own

2. Low reputation of one of the franchises in the absence of proper quality control can affect
the reputation of the firm;

3. Difficulty in controlling the reliability of financial reporting franchisee

4. The franchisor is preparing a possible competitor in the face of franchisee company

Factors of selecting entry mode:

Before selecting a entry mode every firm should analysis the below factor:

a) Competitive Pressures

One of the most evident forms of a reactive motivation is reaction to competitive pressures.
Firms may fear losing domestic market share to competing firms that have benefited from

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economies of scale gained by global marketing activities. In this way, they may fear losing
foreign markets permanently to domestic competitors that decide to focus on these markets,
knowing that market share is most easily retained by the firm that obtains it initially. So,
competitors are an important external factor stimulating internationalization. For example:
Coca-Cola and Pepsi competition, where the latter was influenced by the former and to move in
same direction.

b) Domestic Market: Small and Saturated

In cases when the domestic market is small and saturated for a company, then the
company may be pushed into exporting. For some firms, domestic markets may be unable
to sustain sufficient economies of scale and scope, and these companies automatically
include export markets as part of their market entry strategy. Other companies may
experience volatility along with greater risks in their home market. These risks could be related
to the economy, currency valuations, political, etc.

c) Overproduction/Excess Capacity

Overproduction by companies can lead companies in many cases to a motive for new markets in
order to get rid of the accumulated inventory. This situation can be the trigger for starting export
sales via short-term price cuts on inventory products.

d) Unsolicited Foreign Orders

As a result of advertising and other forms of marketing communication many inquiries

e) Extend Sales of Seasonal Products

Seasonality in demand conditions may be different in the domestic market from other
international markets. For example: A producer of agricultural machinery in Europe might have
a demand from its domestic market primarily in the spring months of the year.

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f) Proximity to International Customers/Psychological Distance

One of the most significant roles that play in doing business in international markets is the
physical and psychological closeness of the firm to the market. For example, German firms
established near the Austrian border may not even perceive their market activities in
Austria as global marketing. Most European firms automatically become international
marketers simply because their neighbors are so close.

g) Profit and Growth Goals

Companies have a strong desire for short-term profit especially companies that are at a stage of
initial interest in exporting. The motivation for growth may also be of particular
importance for the firm’s export start. Some companies are profit seeking, so they seek
international markets where they can increase their profits by selling to customers who are
willing to pay more for the same product than their domestic customers are.

h) Managerial Motives

Managers are motivated toward marketing activities from their desire, drive and
enthusiasm of management. This enthusiasm can exist simply because managers like to be part
of a firm that operates internationally. So, managerial attitudes play a critical role in
determining the exporting activities of the firm.

i)Foreign Market Opportunities

Market opportunities act as stimuli for the firm that has or is capable of securing the
resources necessary to respond to the opportunities. Companies see opportunities in foreign
markets as chances for operating and expanding their businesses.

j) Economies of Scale

Economies of scale can be reached by participating in global marketing activities which may
enable the firm to increase its output and therefore climb more rapidly on economies of
scale. The Boston Consulting Group showed that a doubling of output can reduce production

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costs by up to 30 per cent this effect has been very much sought. Therefore, increased
production also helps in reducing the cost of production.

k) Tax Benefits

Tax benefits can also play a major motivating role. In some countries taxes are lower
that make companies to have more profits. This practice is in conformity with
international agreements and provides firms with certain tax deferrals. So, tax benefits allow the
firm either to offer its products at a lower cost in foreign markets or to accumulate a higher
profit.

About IKEA:

IKEA was founded by Ingvar Kamprad, at the age of 17, in 1943 as a tiny Swedish mail-order
catalogue business and he was selling household goods like pens, wallets and picture frames.
Today IKEA is a global home furnishing brand with 313 stores in 38countries around the world.
IKEA is named after the initials of founder Ingvar Kamprad, Elmtaryd, the farm on which
hegrew up, and Agunnaryd, the nearby village. The IKEA catalogue was born in 1951, and in the
same year Ingvar decided IKEA should sell good furniture at low prices. The prices in the first
IKEA catalogue were so low that people were initially skeptical about the quality of the
products, so Ingvar decided to convert an oldwork shop into a showroom where people could
look at and try products before ordering. It consists of 9,500 home furnishing articles.

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IKEA’s Mission:

To offer a wide range of home furnishing items of good design and function, excellent quality
and durability, at prices so low that the majority of people can afford to buy them.

IKEA’s Vision:

IKEA’s vision is to create a better everyday life for the many people.

IKEA’s Product and categories:

PRODUCT

• Flat sized packaged boxes

• Basic assembling guideline

• Modular storage

• Easy to assemble

• Food, with a European touch

• In-store restaurant

• Product extends to service

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• Excellent Sweedish design

• Using different types of wood for a single wooden product

• High quality materials on furniture surfaces

• All IKEA products come with a 2 years everyday quality guarantee

• Same day shipping with the online shopping

• Sewing service for textile products

• Flexible return policy

• Has 24 hours open call center for any questions.

Product Line:

• Bathroom

• Laundry

• Bedroom

• Lighting

• Children's IKEA

• Living room

• Cooking

• Secondary storage

• Decoration

• Small storage

• Dining

• Textiles

• Eating

• Workspace

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• Hallway

• Youth room

• Kitchen

IKEA’s competitor around the world:

Worldwide operation:

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Core Competency of IKEA:

IKEA’s core competency is their management not technical. until now IkEA’s international
marketing strategy has been tightly and centrally controlled by corporate headquarters. however,
high local pressures emerging due to demographic and cultural differences might force the local
IkEA shops to take strategic initiatives to respond to local market needs. In this connection,
discuss the regional head- quarters and transnational organization as hierarchical entry mode
alterna- tives to the very centralized strategy emanating from IkEA’s headquarters. IKEA’s
headquarter control all of the decision. IKEA has focused its strategy on the core competency of
sustaining profitability through a low-cost business model. This model allows IKEA to examine
the true cost involved in a specific product or process, including the design, sourcing, and
operational expenses involved. While growing its operations, IKEA has also capitalized on
maintaining low costs.

IKEA believes that it can be a low-cost leader without sacrificing quality or compromising its
corporate social responsibility. To generate low cost savings IKEA uses a flat packing process
that allows more merchandise to be shipped and stored between distribution centers. The
company wants customers to understand that their role is not to consume value, but to create it.
IKEA has been able to modify the value chain approach by integrating the customer into the
process and introducing a two-way value system between customers, suppliers, and IKEA’s

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headquarters. Through this, the company is able to create a supply chain that is differentiating
and growth enabling, which allows IKEA to operate efficiently.

IKEA’s core competencies have also helped to accomplish a sustainable business model in the
United States. IKEA has a strategy that leverages its unique core competencies, resources, and
distinct capabilities over furniture retailers in the United States. Although IKEA faced challenges
in understanding the American culture in terms of furniture, it was able to sustain itself through
the competency of consumer intelligence. The business model allowed IKEA to align with what
customers wanted.

IKEA was able to strengthen its sustainability by offering something unique to the American
consumers. The company captured the idea that shopping should be an experience and changed
the way an American consumer shopped. IKEA created a destination that included playgrounds,
restaurant with good food, showroom effects, and a relaxed environment for shoppers. The
company also ensured sustainability through continuing to build a brand and positioning itself.

SWOT Analysis:

STRENGTHS: Strengths could include a company’s specialist marketing expertise or its

• A strong global brand which attracts key consumer groups. It promises the same quality and
range worldwide

• Vision – ‘to create a better everyday life for many people’

• Strong concept – based on offering a wide range of well designed, functional products at low
prices

• Democratic design– reaching an ideal balance between function, quality, design and price.
IKEA’s ‘Cost Consciousness’ means that low prices are taken into account when each product is
designed from the outset.

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•IKEA measures its strengths using Key Performance Indicators (KPI).

OPPORTUNITIES: Elements that the project could exploit to its advantage is known as
opportunity. Generally, businesses use its strengths to take advantage of the opportunities that
arise. In this case, IKEA believes that it is environmentally focused business conduct, will result
in good returns even in a price sensitive market. Some of the opportunities that IKEA takes
advantage of through its sustainability agenda are:

• Growing demand for greener products.

• Growing demand for low priced products. Trends in the current financial climate may result in
consumers trading down from more expensive stores.

• Demand for reduced water usage and lower carbon footprints.

WEAKNESSES: Every business has to acknowledge its weaknesses in order to improve and
manage them. This can play a key role in helping it to set objectives and develop new strategies.
In this case, IKEA weaknesses may include:

• Size and scale of its global business that could make it hard to control standards and quality.
Some countries where IKEA products are made do not implement the legislation to control
working conditions. This could represent a weak link in IKEA’s supply chain, affecting
consumer views of IKEA’s products.

• Their need for low cost products & needs to be balanced against producing good quality. IKEA
also needs to differentiate itself and its products from competitors and believes no compromise
between being able to offer good quality products and low prices.

• IKEA needs to keep good communication with its consumers and other stakeholders about its
environmental activities. The scale of the business makes this a difficult task.

THREAT’S: Threats are external characteristics which may be potential sources of failure to the
organization. If a company is aware of possible external threats, it can plan to counteract them.

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By generating new ideas. In this case, IKEA can use a particular strength to defend against
threats in the market. Threats to IKEA may stem from:

• Social trends – such as the slowdown in first time buyers entering the housing market. This is a
core market segment for IKEA products.

• Market forces – more competitors entering the low-price household and furnishings markets.
IKEA needs to reinforce its unique qualities to compete with these.

• Economic factors –the recession slows down consumer spending and disposable income
reduces. IKEA addresses these issues in many ways. It manages weaknesses and threats to create
a positive outcome.

Problems faced in foreign market:

In the time of expansion the business IKEA face many problems. Some of the
problems given below

Problems faced in USA:

a. Beds were not long enough

b. Kitchen cabinets did not fit appliances

c. Sofas were too hard and not big enough for American comfort

d. Curtains were too short

e. Dimensions were in centimeters rather than inches

Solution: Revise catalogue and dimension

Problems faced in Japan:

a. Japanese People are Family oriented

b. More into larger local stores

c. Big family live together in a small house

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d. Mega Stores were considered Quality oriented

Solution: Re-build small stores into Mega stores.

Problems faced in China:

a. Specialized products only for China

b. Most of people didn’t had cars as a reason they usually use public transportation.

Solution: Redo Placement.

Also most of the country has different choice and language is another barrier to represent the
brand and governments rules and regulation sometimes create hassle for entry.

Decision about entry mode of IKEA:

Yes, I think Franchising and wholly owned subsidiaries is the wise decision that IKEA take to
entry in foreign market but for the future expansion, I suggest that IKEA should take joint
venture strategy as business expansion strategy in India country. Joint venture is a good strategy
to assist a company enters into a different cultural market. As an example, Wal-Mart knew
nothing about Asian retail market, they choose entered into Hong Kong via joint venture with
Thai conglomerate. IKEA has not yet explored joint venture and strategic alliance based on the
pros and cons of these two strategies.

Conclusion:

IKEA has earned the name because of its unique business idea and serving to a particular
segment, its corporate and business level strategies which are different from its competitors and
are well supported by its operations strategies. Among various performance objectives (quality,
speed, dependability, flexibility and cost) which are prioritized by the firms on the bases of
customer’s requirements and compactor’s strategies and thus try to achieve a competitive edge
for firm, IKEA has chosen cost and flexibility as its competitive edge. It has achieved edge on
these parameters by developing a strong supply network and investing in process and
technology.

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References:

1. IKEA (2013). About IKEA. Available at:

2. The Times 100 (2012). Business Case Studies. Ikea case study. Available at:
http://businesscasestudies.co.uk/ikea/swot-analysis-and-sustainable-
businessplanning/strengths.html#axzz2VB9TPpjz

3. Interbrand (2012). Best Global Brands in 2012. Available at:

4. Wikipedia (2013). IKEA. Available at: http://en.wikipedia.org/wiki/IKEA

5. http://kevinrjohnson.weebly.com/uploads/5/6/3/7/5637086/marketing_paper.pdf

6. http://shazeeye.com/value-proposition-and-positioning-ikea-case-study

7. http://www.milliyet.com.tr/fransiz-conforma-turkiye-
yiterk/ekonomi/detay/1842760/default.htm

8 http://www.milliyet.com.tr/ikea-nin-alman-rakibi-
turkiyeyegeliyor/ekonomi/ekonomidetay/25.03.2011/1

THE END

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