IKEA’s re-entry in Japan from the learning from first time failure

First of all, a broad literature review on IKEA’s company background and international
expansion will be discussed. Moreover, a comprehensive analysis of IKEA’s entry mode
strategies in different countries considering the political, social and other factors. Finally,
suggestions of IKEA’s potential future international strategies continuing with the growth.

IKEA Svenska AB was founded in 1943, later which has become the world’s largest furniture
retailer specially targeting low price and stylish products. Indeed, the slogan is “Low price
with meaning”, and the Vision Statement is “To create a better everyday life for the many
people” (IKEA Group, 2011; Moon, 2004).The first showroom was opened in Älmhult,
Sweden in 1958. After that IKEA established a manufacturing subsidiary named Swedwood.
IKEA became an international retailer in 1963, by opening the first store in Norway. In 1973,
the company expanded far away in Nordic countries with the opening a store in Switzerland.
In 2007, it became the world’s biggest furniture retailer with 237 stores in 35 countries and a
workforce of some 90,000. As of today, IKEA has 445 stores in 35 locations worldwide. As
an internationally known furnishing manufacturer IKEA’s yearly revenue has gradually
grown over the past twenty years. Because of the pandemic, the revenue dropped a little bit
for the very first time in 2020, amounting to 39.6 billion euros. But the following year, net
sales grew again and amounted to over 40 billion euros.

Figure: IKEA’s Revenue (2001-2021) (Statistica, 2021)

IKEA expanded in Europe with the help of conservative internationalization policy.

According to this policy, IKEA does not access a new prospective market by just opening a
store. Rather, a supplier liaison with the host location is established. This was a deliberate,
and risk-reducing approach because local suppliers can help regarding valuable input on
social, political and legal, cultural, financial and other issues that indicate opportunities or
threats to the IKEA. In the 1970s and 1980s IKEA focused on its international expansion in
Europe and in North America, mainly through company-owned subsidiaries and stores.

It also changed it’s internationalization strategy in terms of some exceptions. For example;
IKEA entered China by joining a venture approach which was due to the Chinese government
foreign policy which encouraged international companies to team up with local companies.

IKEA’s Internationalization Process:

Figure1.2: Timeline of IKEA’s internationalization (Jonsson, A., & Foss, N. J. (2011))

Explorative internationalization:

In 1963, IKEA began its international expansion by entering the Norwegian market as a
direct result of the saturation of the Swedish market and based on an idea that huge amounts
of sales could trigger it to manipulate economies of scale and price-based competitiveness.
Six years after that, IKEA stepped into the Danish market.

Later, Kamprad’s logic for targeting the conservative Swiss furniture market was a challenge
as it entered a location outside nordic countries. If IKEA could be successful there, it
probably could be successful in other markets as well (Ma˚rtensson, 1988). There are now
nine stores in Switzerland and the company generated sales of CHF1.1 billion ($1.1 billion)
last year (Swissinfo, 2019)

In Japan IKEA experienced a rather challenging and expensive entry because it was
unplanned and happened due to an internal IKEA unit. The export department was selling
products to japanese firms. IKEA has a joint venture unit with a Japanese subsidiary. As a
result products are sold at high prices. Well that idea violated the IKEA concept because it
wasn't able to control it’s operations. The Japanese experience was a learning experience for
IKEA which was due to excessive exploration. That’s when IKEA recognized that the top
management should focus more into conceptualizing IKEA’s business idea in the view of
internationalization.

Exploitative internationalization: IKEA conceptualized their business idea in the context of

internationalization that started with an internal document drafted by Kamprad in 1976. This
document – the Testament of a furniture dealer – is basically a try to codify and document
fundamental IKEA values and beliefs. Notably, more focus was placed on standardizing
marketing solutions. From the beginning towards the end of the 1970s, retail stores were
developed, and the blue-and-yellow store idea was used in all new locations. Moreover,
stores were also standardized to economize on building costs, and to support brand
awareness. One big example of such efforts was the attempt to paint all IKEA retail stores
with blue and yellow, which was made finally of IKEA’s entry into the German market.
Painting all the stores with blue and yellow created an example of one market affecting the
whole IKEA. (Jonsson A and Foss J, 2011)

Flexible replication:

Flexible replication entails the ability to replicate and apply the business model to foregn
markets. This idea is one of the key driver’s of IKEA’s internationalization and company
success. (Kreutzer, Markus & Meissner, 2013). IKEA’s mechanism to continue the ongoing
learning process is focused on frequent modification of the format for replication. Not only
that, IKEA follows replication as hierarchical: lower level attributes (marketing, efforts, and
so on) are allowed to differed between IKEA stores considering market-based research, on
the other hand, higher level attributes (for example; values, vision, etc.) and replicated in an
invariable way between store and change only very slowly in response to research. (Jonsson,
A., Foss, N, 2011)

Wholly owned Subsidiaries

IKEA did their major expansion with a wholly owned subsidiary. A wholly owned subsidiary
indicates when a company’s common stock is completely owned by a mother company. This
strategy gives permission to the parent to diversify, control, and possibly lower its risk. In
general, wholly owned subsidiaries hold legal control over operations, products, and
processes. (WILL KENTON, 2020). IKEA’s corporate foundation is categorized into two
divisions which are operating and franchising. In addition, Most of its operations are
monitored and controlled by INGKA Holding B.V. Ingka Holding B.V. is one of IKEA’s 12
franchisees, operating IKEA stores under franchise agreements with Inter IKEA Systems
B.V. Inter IKEA Systems B.V. is headquartered in the Netherlands which was controlled by
the Kamprad family. Inter IKEA Group and Ingka Group have the same creator, however,
these are two different groups of companies with different management and different owners.
Every IKEA franchisee pays a 3% franchise fee to Inter IKEA Systems B.V. The franchise
fee allows them to work as an IKEA retailer, the right to operate showrooms and
miscellaneous sales channels within the IKEA Concept and IKEA Brand. It also allows
access to policies, procedures and benchmarked solutions as well as training, and updates of
the IKEA Concept for example; store layouts, display ideas and so on. (Ingka Group, 2020)

However, the idea of wholly owned subsidiary strategy is quite an expensive choice for a
company that could even direct to major financial risk if not successful. In addition, IKEA
has to cover the total expense and risk by themselves to set up the factories, stores and retail
shops operations in the host country (Hill, et. al., 2011). Japan was the best example of this
concept.
Expansion by franchising: IKEA used franchising to those markets when they found the
market was small and high risk. In 2010 there were 34 franchised stores ( Figure 3).
Forwarding to the international expansion plan, these stores were issued by Inter IKEA
Systems B.V. Later, potential candidates were carefully analyzed and evaluated and
franchises are given to only those companies with stable financial performance. Franchisees
were required to have a general type of product, but have the authorization to change the style
of the remaining product mix to fulfill the local customers preference. Moreover, all items
have to be bought from IKEA’s product lines. to control service and quality standards.
Furthermore, individual entities are audited from time to time to maintain corporate
performance. Not only that comprehensive training and operational backup is provided from
central. All franchisees pay the required franchise bill to IKEA Holdings. However
advertising and catalog service is also provided by the central headquarter. IKEA’s
customized method to use Franchising is seen as a medium to maintain main corporate
strategy. (StudyMoose, 2016)
Entry strategy in JAPAN:

"The Japanese market and consumers were not ready for IKEA, and IKEA was definitely not
ready for Japan at the time [in the 1970s and 1980s]… Now we have done the major markets
in the world why shouldn't we be in the second-biggest retail market in the world?"1 (Tommy
Kullberg, 2006)

"Multinational companies entering Japan often don't spend enough time to understand the
nature of the competition here, which is usually fairly fierce, and the so-called unique needs
of Japanese consumers. The key challenge for IKEA will be to translate their very globally
successful concept, the type of design they offer and their retail format, into an acceptable
Japan. (David Marra, 2006)

IKEA first moved to the Japanese market as the economic expansion in Asia emerged (Lane,
2007) by granting a franchising deal in 1974 (Wijers-Hasegawa, 2006). But, IKEA had a
difficult situation to establish their existence in the 1970s. In Asia, Japan was the first nation
that IKEA considered to enter in 1970’s during their international expansion. At that time,
Japanese customers were not feasible with their products as it didn’t fit into their tiny
apartments and it was not affordable either. There were no local employees in the store to
gain any feedback or to obtain the customer’s rapport.

Japanese consumers are different from European and other nations. They abstained from low
price goods, preferring to pay high price for high quality goods, and high-end department
stores. The first and probably the biggest issue of IKE in Japan was the size of the
furniture.IKEA tried to establish the standardized dimensions idea that were used in north
European countries. As a result, it hardly fits well in Japanese flats. That problem was created
by IKEA’s standardization strategy by making the product size the same all over the world.
Then, another important issue taken into consideration is how people are going to transport
the furniture if they come to the store using public transport. ALso, what if the furniture
doesn't fit in the vehicle?

The DIYApproach: IKEA’s do-it-yourself (DIY) approach was their innovative idea to split
the cost between manufacture and final user. The financial tactics were used to lower the
production cost. So, IKEA fabricates the details and percel them, the customer transfers and
assembles them. (Viktoriya Kuzina, 2018). Therefore, IKEA was able to grab more profit
when customers had to carry the delivery of the furniture and assemble it themselves.
According to Devangshu Dutta, chief executive of Third Eyesight, a retail consultancy
entails: “When they sell flat packs, there are no assembling costs, no shipment costs and
mostly products are sold on catalogs, which helps them reduce operational costs and lower
prices. Those flat packs work well with young consumers whose budgets are normally tight,”
says Dutta. However, Japanese customers were not ready for the DIY approach. The main
reasons to be unsuccessful in Japan were IKEA's lack of readiness for the Japanese market
and lack of readiness of Japanese consumers for DIY(do-it-yourself concept)
(Wijers-Hasegawa 2006). That helped IKEA to do comprehensive research about the market
to introduce and adapt the products. We can see that IKEA was unsuccessful to enter Japan
before due to different culture, customer’s lifestyle and purchasing behavior.

Re-enter Japan with a different strategy:

After almost 32 years from the first entry, IKEA re-entered into Japan by launching its
second-largest outlet outside Sweden. In addition, it was a joint venture with a Japanese
company. In 2002 IKEA Japan K.K in collaboration with JETRO, which is a government that
boosts mutual funds and investment for Japan with the rest of the countries, with an objective
to encourage FDI into Japan.

IKEA’s mission was to persuade the customers that they now appreciate the distinctive
Japanese culture and preference. For instance: “IKEA converted a gingko tree-lined
boulevard in Tokyo's popular shopping area of Aoyama into an open-air museum. Fifteen
box-like shapes, each of them was of a conventional Japanese room, are well organized and
fitted out with IKEAproducts. The exhibition was the company's innovative promotion to
persuade Japanese customers that they understand their lifestyle.” (Bloomberg 2006).

IKEA's entry in Japan was successful because of a valuable lesson learned from the first time
failure. IKEA has dynamically established its existence with several stores and with a
customer segment who is loyal to the brand since 2006. However, it took two attempts to
grab the Japanese market. IKEA entered Japan in 1974 but due to not meeting the customer’s
preference and to meet customers' expectations they had to withdraw their operation from
Japan. But, IKEA decided to re-launch its products in 2002 by doing comprehensive research
about markets and customer expectations.(Alexandra, 2009).It took 20 years to learn different
strategies that helped IKEA to establish its operation in Japan. (Harapiak, Clayton, 2013).

❖ Taking into consideration the local ways and standards of living.

❖ Identifying variation of customer’s experience.
❖ Maintaining well-matched prices and quality.

Even though this time IKEA will focus to 'act local' by adapting their products according to
Japanese customer’s preferences, it still anticipates numerous challenges from Japanese
consumers who are known to be unsure and uncertain, and that was the reason for many
foreign retailers to exit Japan.

IKEA’s future international strategies, and why?

In my opinion, IKEA should enter one of the South American markets as a future
internationalization strategy. According to my research Brazil could be a better opportunity to
expand its business. In comparison with other South American countries, Brazil has the
highest Market Potential Index (MPI) (Furniture - Brazil | Statista Market Forecast, 2021). As
a result, Brazil’s economy is the best of all the other South American countries (CIA,
2012).The Brazil furniture market is growing exponentially with some helping factors, for
example; growing number of households, and increasing spend on home designing and
furniture products. (Furniture - Brazil | Statista Market Forecast, 2021)

Figure 1.3 Revenue comparison (Statistica, 2020)

Moreover, the Brazilian furniture industry has advanced recently with the help of foreign
trade, improvement of the local market. Another important factor is forestation wood which
indicates a competitive advantage to lower the cost. Net sales in the Furniture market was
about US$56,597 million in 2021. According to financial speculation by CAGR (2021-2015),
the market is expected to rise yearly by 6.78%. (Furniture - Brazil | Statista Market Forecast,
2021)

Figure 1.4 Brazilian Furniture Industry (Statistica, 2020)

Although the brand is well known because of its design and low price, there will be some
difficulties in the Brazilian market. For example; brazilian furniture market is very
competitive. In addition, the tax rate is very high for international companies. Last but not
least, they will also have to convince the Brazilian customers to avoid a failure like they had
in Japan.

Since Brazil is highly competitive and has high taxes for imports. Therefore in that case
IKEA has to find another solution other than importing. In my opinion IKEA has to start their
own production house in Brazil to minimize the logistics cost and maximize the profit with
the help of low cost forest wood. Also, IKEA needs to change their DIY strategy because
Brazilian people already got used to getting assembled furniture delivered from Etna and Tok
& Stok, which are considered to be the most popular furniture chain.

One of the factors which I took into consideration is the opportunity to grab early market
entry. When it will enter into the South American market before other MNC it will easily get
the advantage of being a first mover to achieve the early demand and create a strong brand
loyalty. The main benefits of first mover are the capacity to pre-empt competitors, early
demand with the help of strong brand name, drives the learning curve ahead of competitors
and the to establish switching costs that will make customers loyal into their
products.(Montgomery, 1988). According to the historical date, the past history of IKEA’s
early move was in Canada(1976), USA (1985), and China(1998) (IKEA, 2012).

Moreover, low cost forestation can decrease the product price as the world’s largest
rainforest, The Amazon, is situated in Brazil. Thus, IKEA can fabricate high quality furniture
with high quality wood. Besides, the labour is cheap in Brazil compared to other countries.
In other words, Brazil has significant comparative advantages compared to other exporting
countries because it has excellent quality of raw materials at low costs and flexible labor
(n.a., 2004).

In terms of entry mode strategy, I believe that IKEA should enter the Brazilian market using
wholly owned subsidiaries because the market is competitive for instance; there are around
16,000 furniture companies in and most of them are local companies. To get the advantage of
a wholly-owned subsidiary, the mother company needs to gain the 1% minority shares from
the public to acquire full control over the operations of the company (Thakur, 2021).So, with
wholly owned subsidiary IKEA can easily gain full control over the operations which will
lower the brand risk (Back et.al., 2011). As a result IKEA can make decisions to fabricate
products considering the local consumers preference and living style. So, entering into the
South American zone could be a lucrative opportunity for IKEA towards further
internationalization and globalization.

In short, nothing will restrain a well established brand like IKEA from growing and analysing
the path to further expansion internationally. IKEA is a popular brand because they always
tried to fulfill customer expectations keeping in mind the cost too. That is enough to
strengthen their business for further expansion.

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